The Truth About Spending in Retirement and Why It’s Good News

**Robert Brokamp** (0:02)
How Your Spending May Change in Retirement and Why It Might Mean You Could Withdraw More in Retirement. That's the topic of discussion on this Saturday Personal Finance Edition of the Motley Fool Hidden Gems Investing Podcast.
Knowing how much income you'll need in retirement is a key variable in determining how much you need to have saved before you stop working. But retirement isn't just one financial goal, it's a series of annual goals. How much you need in the first year of retirement, and how much you need in the second year, and then the third year, and so on. Here to talk about how spending changes over the course of retirement is David Blanchett, the head of retirement research at Prudential Financial and a portfolio manager at P-GEM. David, welcome back to the show. Good to be here.
When it comes to retirement planning, the default assumption is that retirees need their income to go up each and every year with inflation. We see this assumption in most retirement calculators, I think most financial planners assume that, and even most of the research into retirement, including the old 4% rule. For over a decade, you've been doing research that has questioned this assumption including a recent study. So tell us about your latest thinking about how spending changes over the course of a retirement. Sure.

**David Blanchett** (1:12)
To be fair, I still do research where I assume, depending on rises by inflation. So it's a very common assumption, like I still use this out there a lot. But I think that one of the most important questions we've got to ask ourselves thinking about retirement is like, how do we think spending is going to change over time?
The most common assumption that we use in research and financial planning tools and all this is that spending is going to increase every year by inflation. So effectively, what you're going to spend in the future is the same as what you spend today in today's dollars. So historically, inflation is averaged about 3 percent a year. So we would assume that every year you'll spend effectively 3 percent more. In a piece of research I wrote that was published about a decade ago and then an updated piece that was just released in the Financial Planning Review, I kind of revisit this topic of, well, how does spending change over time? And there's pretty convincing evidence that most people as they move through retirement won't increase their spending by the full amount of inflation. So for example, if inflation is 3 percent a year, you might only spend 1 percent a year per more and that kind of compounds over time.

**Robert Brokamp** (2:15)
So is this due to choice or is it people not having enough money and they realize, oh no, I shouldn't have retired, I need to cut back my spending?

**David Blanchett** (2:23)
That's one of the most common questions I get asked about this research, both currently and then historically. And I think it's a mix of both, right? But one thing that we can do is look at retirees who have lots and lots of money and see how their spending changes. And so even if you just focus on retirees who could spend more, so they're very well funded, they actually tend to cut back as well. So I think that a lot of this actually just is choice. This is kind of fun model people talk about, like the go-go, the slow-go, the no-go years. I think that for a lot of people, as they age, they slow down. Part of that is because they have health issues, but part of it is just because we just don't want to do as much, the older we get sometimes.

**Robert Brokamp** (3:01)
Is there anything else going on here? So for example, according to the Federal Reserve, about two-thirds of the people in the age ranges of 65 to 74 have debt.
So is it maybe they're paying off a mortgage, or is there anything like people enter retirement married, but sadly one spouse passes away and expenses drop? Is there anything specific about that, or is it just a general decline in spending?

**David Blanchett** (3:24)
It's just a general decline. I mean, I've looked at it through a lot of different lenses, through a lot of different cohorts and retirees, and I think that it's very messy. Now, to be clear, year over year, some households spend a lot more, some spend a lot less, but there's actually this really large body of research now looking at variety of data sets that does really strongly suggest that as people move through retirement, they don't increase their spending over year by inflation.