Everything You Want to Know About Retirement Spending

Today we’re going to continue sharing thoughts from the book How to Retire by Christine Benz.

It’s a great book which I highly recommend. And as with the last article, I’ll be giving away a copy of the book at the end of this post.

We’ve already posted on this book as follows:

• How to Retire
• Planning for Retirement
• Strong Relationships Make a Successful Retirement
• Activities, Meaning, and Mental Health in Retirement
• Thoughts on Social Security

You may want to check these out if you missed them.

Today we’re covering chapter 5 where Christine interviews David Blanchett, who has supposedly been “one of the top retirement researchers in the world for nearly two decades.”

This interview focused on a very interesting subject — retirement spending.

Spending is easy, right? We’ve been doing it all our lives! Hahaha. Unfortunately it’s not easy for many once they get to retirement.

I really enjoyed this discussion, so let’s get into it…

Retirement Spending Overview

We begin we have this statement from David:

The obvious, immediate caveat is that everyone is different. But we have some really interesting data sets that track the same households over decades. When you track people over time in the Health and Retirement Study (HRS), there’s very strong evidence that the average retiree does not increase their spending every year by inflation. [The HRS is conducted by the University of Michigan and collects data on Americans, with a specific focus on retirees.]

Let’s say that inflation is 3% a year on average. Retirees’ spending doesn’t go up by that full amount each year; it will go up less, on average, say I% to 2% per year. Over a 20- or 30-year retirement period, that can make a massive difference in terms of how much they have to save for retirement and how much they can spend.

Spending in retirement is a big issue — whether you have a little or a lot.

If you have a little, you have to watch every penny and worry about running out of money.

If you have a lot, one of the actions that got you to this point is controlling your spending. It’s hard to make the shift from being a saver to a spender as you have to go against 30-50 years of habits, training, and preferences.

These two sides of the same coin show that spending in retirement can be an issue for almost everyone. The result is that most people control their retirement spending much more than they thought/planned for.

The implications from this (at least for those of us with more than enough or working on it) are that 1) we can spend more than we are spending or 2) we don’t need to save as much (which means we can retire earlier).

They then discuss the “retirement spending smile” where spending declines at the start of retirement and then spikes back up at the end of life (generally due to medical costs). You will need to check out their discussion of that in the book if you want to dive deeper.

They then move the conversation along with David commenting as follows:

If people have been working, they have been delaying gratification for a lot of different reasons. When they’re retired, they can go out and consume. The key is that the younger and the healthier you are when you retire, the more you might want to try to actively do things because you may not always be able to when you get older.

Thinking about decline in future spending can be good for people, because you can create the expectation that if you’re retiring a little early, you want to be sure to go out and do things while you can. But let’s also set the expectation that as you move through retirement, you may have to spend a little bit less.

My “problem” is/was that the things I enjoy doing don’t cost that much (time with family, pickleball, reading, etc.) Who knew I could be so easily entertained? It must be that Iowa upbringing. lol

The big retirement cost many have/want is travel (it’s the #1 form of extra spending I’ve seen from the millionaire interviews and is a hot topic in the Millionaire Money Mentors forums.) I’ve pretty much had my fill of travel. I struggle to find a place I want to go where the cost in hassle and aggravation of getting there is worth the experience once you arrive.

The thought of air travel in any form — even if I fly first class — is about enough to make me physically sick. It’s a HUGE hassle in so many ways.

I’ve been at least once to all the places I’ve ever wanted to see. At this point, it’s more fun, relaxing, comfortable, etc. to be home. We’ll likely make more local trips (few hours here and there…driving) but that’s it for now.

I know many want to travel and love it, and I enjoy hearing their stories. But it’s just not for us. We’re happy at home, so why leave?

That said, my passport is up for renewal in a year or so and I will likely get it renewed as I reserve the right to change my mind on travel.

Next, the conversation makes a murky turn (haha):

It’s really important to have income that is guaranteed and protected for life, to cover your essential expenses. It’s very economically and behaviorally efficient to have income you know you can’t outlive. The best option for that is going to be Social Security benefits; nothing else remotely comes close. The more that you can maximize Social Security, the more that you can spend overall, because you know that no matter how long you live, you’re going to have that certain income. There is some risk early on if you’re spending more to delay Social Security, especially for married couples. But once you get through that, you can actually spend more over time.

Income “guaranteed and protected for life.” Any idea what we’ll be covering next? lol

As for the maximizing Social Security conversion, you already know what I think of that (if you missed it, see the Social Security article in this series…it’s linked at the top of this post.)

Annuities in Retirement

And so here we are…we’re going to chat about annuities.

Christine asks the following:

Can you touch on annuities as a component of this, especially a very basic sort of product that provides someone with a stream of income that will last their whole life? You talked about Social Security and the value of enlarging Social Security benefits so that you’re alleviating spending demands on your portfolio. But can you talk about how an annuity might fit in here?

David responds as follows:

The “a” word is perhaps the most ambiguous word in the dictionary. But to me, it’s pretty unequivocal. If you want more guaranteed income, you want to first exhaust your options with respect to Social Security. In other words, delay claiming as long as you can. After that it might be worth considering annuities, given the potential economic benefits, which is something I’ve focused on for most of my career.

I think the behavioral benefits of buying an annuity that provides lifetime income can exceed the economic benefits. It can be difficult spending money from a portfolio when you don’t know how long it has to last and what your returns will be. Managing spending given an uncertain lifespan and uncertain returns is mentally exhausting.

The annuity gives someone the ability to say, “No matter how long I live, I am going to have money coming in.” That can radically simplify retirement.

I get that the financial advice industry doesn’t have a great reputation, especially with respect to annuities. There are a lot of bad apples out there, but I wouldn’t let them spoil the bunch. You need to understand what you’re buying, and if you don’t understand, you probably shouldn’t buy.

Advisors can offer you a lot of help. But if the advisor is going to charge you a percentage a year to create income for life, it would be far cheaper to do that with an annuity, and you could be more certain of the results if you purchased a product that provided protected or guaranteed lifetime income. There are a lot of improvements we’re seeing in the industry in terms of product availability and solutions for the future.

If you prefer to keep things simple, you can buy an immediate annuity or a deferred income annuity (DIA). They can improve your retirement, especially if you don’t have your essential expenditures covered. If you’ve got all the money you need to cover your central expenses from Social Security or a defined benefit plan, you might not need an annuity. The individuals who would benefit the most from annuities are typically those who are reluctant to access their savings because they don’t know how long they’re going to live or who don’t have their essential expenses covered.

Lots to comment on here:

• Annuities have a bad wrap for several reasons, but generally it’s because they are expensive, are so complicated that they are difficult to impossible to understand, take control out of your hands (which many DIYers dislike), and force you to hand over a big chunk of money that you never get back.
• There are solutions that get around these objections completely or in part, but are they good enough to make you take the leap? And even if some of these are addressed in a policy, is there a policy that delivers on enough of them to make it a “good deal?” This, of course, is a personal decision only you can answer for yourself.
• Some in the Millionaire Money Mentors forums are becoming more open to annuities…though it’s TBD as to whether or not they will actually purchase them.
• There are a few smart people (like David here and author/researcher Wade Pfau) who study retirement extensively and are advocates for annuities. So they can’t be all bad, right? That said, their information is often for the masses and maybe not appropriate for DIYers or any specific person’s unique situation. In addition, there’s a big difference between studying retirement and living it, so the practical realities might not fully be taken into account by those who simply “study” retirement.
• I have come to accept annuities as a possible, solid option for some people in some cases. But they remain a minefield even if they offer desirable benefits — so selecting a good one is very difficult for most people.
• Annuities are high profit and are their industry is fraught with sales people (i.e. not real planners), many of whom are unscrupulous or incompetent, trying to sell a product for their benefit and not the benefit of the buyer. This makes a bad situation even worse.
• “I think the behavioral benefits of buying an annuity that provides lifetime income can exceed the economic benefits.” Hahaha. So in other words, if people would simply change their behavior (and spend more), they could avoid annuities (or at least they’d have more benefit than buying annuities.) So why don’t we all just change our spending behaviors and forget annuities? lol
• “You need to understand what you’re buying, and if you don’t understand, you probably shouldn’t buy.” He says this like understanding these things are easy…which they are not. Plus you first have to find a competent person who has your best interests at heart to find an annuity for you…before they can even begin to explain it. The odds of all these factors coming together are virtually zero.
• He makes a good point about the cost of financial advisors. If they are charging you a ton for managing your investments, that makes annuities cheaper (comparatively) as they don’t have on-going fees for 20-40 years.
• “The individuals who would benefit the most from annuities are typically those who are reluctant to access their savings because they don’t know how long they’re going to live or who don’t have their essential expenses covered.” If you don’t have your essential expenses covered, where are you supposed to get the money for an annuity? As for those reluctant to access savings…we’re back to changing behavior being a better option. And for “not knowing how long you’re going to live,” isn’t that all of us? Hahaha.
• At this point annuities are not part of my retirement plans. Things could always change, of course, but currently they are not part of our planning. How about you? Are you using/considering annuities?

If you want to read more about annuities, here are some previous posts where I’ve discussed them:

• The New Rules of Retirement, Securing and Maximizing Guaranteed Lifetime Income
• Various Forms of Retirement Income
• Our Trip to a Retirement Workshop, Part 3
• The Good, The Bad & The Ugly of the Financial Services Industry…From An Insider’s Perspective

The 6% Rule?

David next makes these interesting comments:

It’s useful for us as an industry to have a very simple heuristic like the 4% guideline. That’s not necessarily a terrible starting point, but it really is an adaptive process. You need to think about your situation, your longevity, how you want to invest, and then figure out what makes sense for you.

A lot of the key assumptions and models that we use today are probably flawed, though. There’s this idea that individuals don’t adjust their spending over time based upon market returns, but that’s not what we see. People definitely cut back if returns are lower than expected. If you incorporate changes to your spending in the future, it can radically affect what you would take out today. It almost unequivocally increases the safe initial withdrawal rate. If you look at actual retiree households, a starting withdrawal percentage of 5% or 6% is probably a reasonable place to start.

It’s similar to investing. People might say, “I will allocate to riskier assets, knowing that I could lose some money, because there’s a higher expected return.” They might also say, “I’m willing to take a little bit of a risk with my spending, because I may well be better off over the whole of my retirement.”

A few thoughts here:

• So if I understand this correctly he’s saying that the 4% rule is a good starting point for retirement spending, but what happens in practicality is that when the market goes down, people pull back on spending. And because of this, starting with a withdrawal rate of 5-6% is probably ok.
• It seems to me that the 4% rule has been creeping up over the past several years. Any chance it will get to 8% so Dave Ramsey can say, “See, I told you so!” Hahaha.
• I like the idea of “taking a risk with spending” and spending a bit more. At least I like it in concept. The only problem is that the cost of being wrong is so high (not being able to finance your retirement with limited options for earning more) that I’m not sure it works well in real life. It will be interesting to see what David does when he’s actually retired.

Next we move onto another hot topic…

Leaving an Inheritance

Christine starts a new conversation with this question:

It seems like a lot of people have this tacit assumption that they want to leave a big chunk of money to their kids. Kids may say they don’t care, so should they have that conversation with their kids to find out?

Here’s David’s response:

It’s giving with the warm hand instead of the cold hand, as the saying goes. If you give money away when you’re alive, you get to enjoy it. You can see the benefits it has. That’s a different type of withdrawal. You can spend it on yourself or give it to your kids.

To me there’s a balance, and I worry that too many of the assumptions and models that we use right now tilt that balance toward underspending. As an industry, we collectively have to provide people with better tools so they can get an idea of what the trade-offs are with some of these decisions.

Lots of thoughts on this one:

• We’ve decided on the amount our kids will receive as an inheritance.
• We’re allowing them to withdraw from that amount now if they have a good reason (down payment on a house, car purchase, extra education, etc.) so they get the money when they need it (now) and not in 20 years when they are (hopefully) financially secure.
• Giving (to the kids as noted above as well as to charities) is our top retirement “expense.” Next year is the last year of the five year giving plan we committed to in 2022. We have met every goal there except for the first one (because it was simply easier to give $100k from a tracking standpoint.) We have a handful of charities we like and support and that will continue through 2026. Then we’ll need to decide where to go from there.
• Here’s an interesting point: despite the fact that we’ve given away so much, have had losses on some real estate syndications, and ramped up spending (primarily driven by moving to a new home), our net worth is at it’s all-time high as of this writing. Pretty amazing.

What’s your take on these issues?

To read the next post in this series, see More on Retirement Spending.

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As I said above, I’m giving away a copy of How to Retire on every post I do about the book. Here’s how to you can enter:

• Leave a comment below telling me what you liked best about this post, what you think you can use, or something you learned from it. Basically just share anything meaningful related to the content above (note: “please enter me to win” and similar comments will not be considered out of pure weakness! At least put a bit of effort into it!) This should be fun!
• Be sure to leave your email address when you leave the comment so I will know how to reach you if you win (the email address will not be visible to anyone other than me).
• The winners will be selected by me at random a few days after this post goes live. I’ll announce who wins in my own comment.
• I’ll email the winner, get their address, and send them a book from Amazon.

As with most giveaways, there are rules. Here they are.

Good luck!!!!