What is a reasonable decline in spending as we age?

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TheTimeLord
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What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 6:59 am

In planning for my retirement the most important thing to me is maximizing what we can do in the early years while providing the ability to pay for our care in the later years. To this end I have developed a basic spreadsheet modeling our after tax income from full retirement to death. I mostly focus on the 3.5% (I have a range from 3%-4%) with a 20% effective tax rate. I have our need for Net Income diminishing over time from a 100% in the first decade of retirement to 67% at the end supporting my wife alone and her leaving a mid-6 figure inheritance to whoever. This plan does include selling our house at the point I project going into assisted living. So here are my percentages through the years below, do they look reasonable to you that the need for income would decline in such a manner as we age? Thanks for the feedback.

First 10 years - 100%
Next 10 years - 83%
Next 7 years - 75%
I die
Last 11 years - 67%
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prudent
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Re: What is a reasonable decline in spending as we age?

Post by prudent » Mon Jun 06, 2016 7:06 am

I've looked at this a couple of times and I concluded I needed to look at what spending categories would be affected, and not an across-the-board assumption. Turned out for us there weren't a lot of categories that would be reduced due to age so the reduction over time might be almost cancelled out by increased medical costs in our case. For the moment I'm planning a 1% per year decline in spending after 70.

If we did a lot of travel or dining out, for example, I'd have a sharper rampdown of spending over time.

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Re: What is a reasonable decline in spending as we age?

Post by 1210sda » Mon Jun 06, 2016 7:37 am

Prior to retirement, I created a retirement planning worksheet on Excel.

I retired early and on top of that, DW is 7 yrs younger than I am. Therefore, my planning horizon was 45 yrs.

I determined what our spending would be at the start of retirement. (This is not the same as our pre retirement income). My desire was to "front load" our spending so, as you, I made adjustments as we aged.

This is what I calculated the first time.

First 15 yrs......100%
Next 10 yrs.....90% (10% adj.)
Next 10Yrs....81% (Additional 10% adj.)
Same as you, I die
Next 10 yrs .....61% (additional 25% adj)

Ten years into retirement,I decided that we could handle being a bit less conservative. We adjusted as follows.

First 15 yrs......100%
Next 10 yrs.....95% (5% adj.)
Next 10Yrs....90% (additional 5% adj.)
Same as you, I die
Next 10 yrs .....67% (additional 25% adj.)

Hope this helps.
1210

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Toons
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Re: What is a reasonable decline in spending as we age?

Post by Toons » Mon Jun 06, 2016 7:47 am

I did all sorts of financial planning,spreadsheets ,,,forecasts etc, before retirement 5 years ago.
Current age, 65
Now,I just enjoy each day as it comes.
Excluding a couple of large purchases we had planned for,
we find ourselves spending 35-40k per year.
Have not found the need to draw down any investments to fund the lifestyle,,as of yet.
Being Debt Free and having downsized have both been huge "pluses"
:D :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 8:02 am

prudent wrote:I've looked at this a couple of times and I concluded I needed to look at what spending categories would be affected, and not an across-the-board assumption. Turned out for us there weren't a lot of categories that would be reduced due to age so the reduction over time might be almost cancelled out by increased medical costs in our case. For the moment I'm planning a 1% per year decline in spending after 70.

If we did a lot of travel or dining out, for example, I'd have a sharper rampdown of spending over time.
Most, if not all of the reduction has to do with a reduction in travel, especially international travel, and buddies trips. Watching some of my older friends you could see how with each year the hassle of a trip was becoming greater than the reward. It would be fair to say that probably all of the 33% that is reduced would be discretionary.
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Re: What is a reasonable decline in spending as we age?

Post by likegarden » Mon Jun 06, 2016 8:10 am

We were debt free when I was 62 and partially retired. We are now 76/71, and still live comfortably from SS and pension. We are healthy, have LTCI in case we need it. Occasional house repairs, i.e. AC and boiler, require getting some money out of savings. We travelled enough when younger, so no expensive trips are planned. Any international trip would be to Europe to family, so no big expensive. Nothing has changed here financially over the last 15 years, and is not expected until one of us has to go into a nursing home, perhaps in 10 years or later. We are planning on 100%, no decline as we age, with some money annually going to family.

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Re: What is a reasonable decline in spending as we age?

Post by grandmacassie » Mon Jun 06, 2016 8:11 am

I think this is unknowable. A person might pass away suddenly and have very little in final health expenses. Or a person might develop dementia or have a debilitating stroke and linger for a decade with high expenses for care. How do you predict which will be your fate? Yes, discretionary spending may decline, but health care costs are a huge wild card.

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Re: What is a reasonable decline in spending as we age?

Post by AlohaJoe » Mon Jun 06, 2016 8:38 am

TheTimeLord wrote:So here are my percentages through the years below, do they look reasonable to you that the need for income would decline in such a manner as we age?

First 10 years - 100%
Next 10 years - 83%
Next 7 years - 75%
I die
Last 11 years - 67%
From Blanchett's "Estimating the True Cost of Retirement"

Image

The "smile" shows that retiree spending drops and then rises again. Your spending changes seem more linear (it looks like about 1% a year) than what Blanchett's research indicates but overall the final numbers aren't too far off.

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Re: What is a reasonable decline in spending as we age?

Post by 2retire » Mon Jun 06, 2016 8:52 am

Here is a link to an article I recall seeing on the subject.

http://www.theretirementcafe.com/2013/1 ... e-age.html

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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 9:03 am

grandmacassie wrote:I think this is unknowable. A person might pass away suddenly and have very little in final health expenses. Or a person might develop dementia or have a debilitating stroke and linger for a decade with high expenses for care. How do you predict which will be your fate? Yes, discretionary spending may decline, but health care costs are a huge wild card.
All of this is true, but we still have to plan for a future where we won't be drawing a paycheck. And I sure don't want to unnecessarily restrict my options in the early years of my retirement when I am healthy.
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BL
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Re: What is a reasonable decline in spending as we age?

Post by BL » Mon Jun 06, 2016 9:11 am

As you get older you may need to hire help for something that was previously DIY. Also with a surviving spouse, you may need to spend more on the things your spouse was doing for the household. Even living at home you may want to pay for home health care or other assistance to enable you to stay at home.

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Re: What is a reasonable decline in spending as we age?

Post by cheese_breath » Mon Jun 06, 2016 9:14 am

We don't splurge a lot and except for some major savings on medical premiums when we became eligible for Medicare our spending hasn't declined at all in the 19 years I've been retired. I'm 75 now so if it's going to happen I'd expect it to start soon. But realistically since we don't splurge I don't see us cutting many, if any expenses except maybe new cars if we become unable to drive any more. On the contrary, I expect our expenses to increase as we encounter more medical issues not covered by Medicare. And if self driving cars become a reality we might be buying new cars after all, probably more expensive than the human driver ones. Given these possibilities plus inflation I'm ballparking about 4% annual increase in our spending with a sizable contingency fund in case I underestimate.
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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 9:18 am

AlohaJoe wrote:
TheTimeLord wrote:So here are my percentages through the years below, do they look reasonable to you that the need for income would decline in such a manner as we age?

First 10 years - 100%
Next 10 years - 83%
Next 7 years - 75%
I die
Last 11 years - 67%
From Blanchett's "Estimating the True Cost of Retirement"

Image

The "smile" shows that retiree spending drops and then rises again. Your spending changes seem more linear (it looks like about 1% a year) than what Blanchett's research indicates but overall the final numbers aren't too far off.
I am probably over estimating the amount of travel in the first 10 years, but I did not want to short change us in that area.
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Re: What is a reasonable decline in spending as we age?

Post by ObliviousInvestor » Mon Jun 06, 2016 9:34 am

From Blanchett's "Estimating the True Cost of Retirement"

Image

The "smile" shows that retiree spending drops and then rises again.
This is a common misunderstanding. The values in the chart are annual changes, not spending levels. For a retiree whose spending tracks the smile, spending decreases the entire time after age 61(ish), due to values being below zero. The point is simply that it's decreasing most quickly around age 75 or so and least quickly in early and late retirement.
Mike Piper, author/blogger

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Re: What is a reasonable decline in spending as we age?

Post by qwertyjazz » Mon Jun 06, 2016 10:38 am

I might be misreading the chart but it suggests based on the Rsquare that age missed 43 % of spending for a norrow rang of ages and 70% for entire retirement - planning is hard especially when it is about the future

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Re: What is a reasonable decline in spending as we age?

Post by Sheepdog » Mon Jun 06, 2016 10:48 am

I don't understand why one would plan on a decline in spending as they age. If may happen, it may not, why plan on it being less? I don't need charts to figure the future. I would rather plan on living a long life and enjoying it. In October I will have been retired 18 years. I haven't spent less (more data coming). I still go to theater (for example, we drove 75 miles to see a show last weekend)and see shows locally and distant thruout the year. We eat in restaurants more so that cost is up. I still buy Indy Colts season tickets and attend all games....they aren't cheap, nor are our Symphony and theater season tickets. We still travel although my last major cruise was 2 years ago (10 day Western Caribbean in a balcony stateroom), but we are planning on a cruise this fall to Canada. Why not? We each buy new cars every 8 or 9 years with my wife's planned for 2017 and mine in 2019 and they certainly aren't lower cost. We have home maintenance and remodeling expenses. they don't change. Medical costs are more expensive, not less. For example, hearing aids cost $2200 each, dental work can be way up there.

This is our spending history. Do I match any average? Will you? In my last year of employment, 1998, when I was 65, our spending totaled $57,831, not including taxes. (Our income tax in retirement was much lower, so I have not included them in this history.) I had no debts at retirement.
I am using 5 year averages since individual years vary so much.

Our spending history (income tax is not included)
1998, last year employed, $57,831
1999-2003 $57,850 average (1 auto purchased)
2004-2008 $59,019 average (0 auto purchased)
2009-2013 $67,514 average (2 autos purchased)
2014-2015 $67,451 average (note 2 years only)

I certainly did not have reduced spending. My standard of living has not changed, not at all. I may look for bargains to lower costs, like going to Aldi for groceries. (Lower costs temper inflation.) Spending in retirement can be quite different than when employed because of discretionary spending (more or less), but I don't think ours were.
My plan is still living a longer life and enjoying it. I wouldn't plan for a spending decline.
People should not say everything they think. They should think about everything they say.

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Re: What is a reasonable decline in spending as we age?

Post by jebmke » Mon Jun 06, 2016 10:57 am

Sheepdog wrote:I don't understand why one would plan on a decline in spending as they age.
Agree. If plan depends on a spending decline, probably shouldn't retire.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: What is a reasonable decline in spending as we age?

Post by 1210sda » Mon Jun 06, 2016 11:00 am

Thank you Mike Piper for your continually insightful analysis.

As for why I budgeted reduced spending (minimally at that), it was to "front load" my spending. I'd rather spend more in my 60's than in my 90's to the extent that I can control it.

1210

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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 11:00 am

Sheepdog wrote:I don't understand why one would plan on a decline in spending as they age. If may happen, it may not, why plan on it being less? I don't need charts to figure the future. I would rather plan on living a long life and enjoying it. In October I will have been retired 18 years. I haven't spent less (more data coming). I still go to theater (for example, we drove 75 miles to see a show last weekend)and see shows locally and distant thruout the year. We eat in restaurants more so that cost is up. I still buy Indy Colts season tickets and attend all games....they aren't cheap, nor are our Symphony and theater season tickets. We still travel although my last major cruise was 2 years ago (10 day Western Caribbean in a balcony stateroom), but we are planning on a cruise this fall to Canada. Why not? We each buy new cars every 8 or 9 years with my wife's planned for 2017 and mine in 2019 and they certainly aren't lower cost. We have home maintenance and remodeling expenses. they don't change. Medical costs are more expensive, not less. For example, hearing aids cost $2200 each, dental work can be way up there.

This is our spending history. Do I match any average? Will you? In my last year of employment, 1998, when I was 65, our spending totaled $57,831, not including taxes. (Our income tax in retirement was much lower, so I have not included them in this history.) I had no debts at retirement.
I am using 5 year averages since individual years vary so much.

Our spending history (income tax is not included)
1998, last year employed, $57,831
1999-2003 $57,850 average (1 auto purchased)
2004-2008 $59,019 average (0 auto purchased)
2009-2013 $67,514 average (2 autos purchased)
2014-2015 $67,451 average (note 2 years only)

I certainly did not have reduced spending. My standard of living has not changed, not at all. I may look for bargains to lower costs, like going to Aldi for groceries. (Lower costs temper inflation.) Spending in retirement can be quite different than when employed because of discretionary spending (more or less), but I don't think ours were.
My plan is still living a longer life and enjoying it. I wouldn't plan for a spending decline.

I think you are assuming that 100% means equal to our current spending. Sorry if that wasn't clear. It is at least 33% increase above my preretirement budget. It may also matter that we will be retired in our late 50's so the first 10 years are prior to 70.
Last edited by TheTimeLord on Mon Jun 06, 2016 11:06 am, edited 2 times in total.
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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 11:03 am

1210sda wrote:As for why I budgeted reduced spending (minimally at that), it was to "front load" my spending. I'd rather spend more in my 60's than in my 90's to the extent that I can control it.

1210
Indeed. I am trying to maximize what I do in the early years when I feel I will be most capable and active. I do feel at some point I will become more of a home body and expenses will drop meaningfully.
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Re: What is a reasonable decline in spending as we age?

Post by AlohaJoe » Mon Jun 06, 2016 11:04 am

Sheepdog wrote: I am using 5 year averages since individual years vary so much.

Our spending history (income tax is not included)
1998, last year employed, $57,831
1999-2003 $57,850 average (1 auto purchased)
2004-2008 $59,019 average (0 auto purchased)
2009-2013 $67,514 average (2 autos purchased)
2014-2015 $67,451 average (note 2 years only)

I certainly did not have reduced spending. My standard of living has not changed, not at all.
Your own numbers show you are wrong. Your spending has dropped substantially, as has your standard of living.

If your spending had not reduced then you should be spending $84,887 this year. You are nearly $20,000 off that.

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Re: What is a reasonable decline in spending as we age?

Post by curmudgeon » Mon Jun 06, 2016 11:18 am

AlohaJoe wrote:
Sheepdog wrote: I am using 5 year averages since individual years vary so much.

Our spending history (income tax is not included)
1998, last year employed, $57,831
1999-2003 $57,850 average (1 auto purchased)
2004-2008 $59,019 average (0 auto purchased)
2009-2013 $67,514 average (2 autos purchased)
2014-2015 $67,451 average (note 2 years only)

I certainly did not have reduced spending. My standard of living has not changed, not at all.
Your own numbers show you are wrong. Your spending has dropped substantially, as has your standard of living.

If your spending had not reduced then you should be spending $84,887 this year. You are nearly $20,000 off that.
Depends on whether you count the "imputed income" from a paid-off house. That is a big chunk that tends to rise at least with inflation.

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Re: What is a reasonable decline in spending as we age?

Post by Sheepdog » Mon Jun 06, 2016 11:22 am

AlohaJoe wrote:
Your own numbers show you are wrong. Your spending has dropped substantially, as has your standard of living.

If your spending had not reduced then you should be spending $84,887 this year. You are nearly $20,000 off that.
Hello, Aloha Joe. Sorry, that isn't so. Are you being judgmental? You can't read standard of living from my data, not mine, not at all, I promise you. As I said, I may look for bargains now. That is not lowering standard of living. No, I don't buy a lot of technology...I didn't then either, as I don't want or need it and that is not lowering my standard of living, not mine...maybe yours. I don't buy new expensive housing as I am living in the same abode for the last 44 years. I travel as much domestically and internationally. I buy autos as often. I eat out more, look for entertainment more, both of which increases my standard of living. You are judging without knowledge.
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1210sda
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Re: What is a reasonable decline in spending as we age?

Post by 1210sda » Mon Jun 06, 2016 11:23 am

Ah yes, inflation. So easy to forget. (BTW, from 1999 to present CPI averaged 2.2% per annum)
1210

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Re: What is a reasonable decline in spending as we age?

Post by avalpert » Mon Jun 06, 2016 11:59 am

TheTimeLord wrote:
grandmacassie wrote:I think this is unknowable. A person might pass away suddenly and have very little in final health expenses. Or a person might develop dementia or have a debilitating stroke and linger for a decade with high expenses for care. How do you predict which will be your fate? Yes, discretionary spending may decline, but health care costs are a huge wild card.
All of this is true, but we still have to plan for a future where we won't be drawing a paycheck. And I sure don't want to unnecessarily restrict my options in the early years of my retirement when I am healthy.
Planning based on false precision can be as dangerous as not planning at all.

Rather than try to create a model that necessarily has huge error bars you are better off with a rough order estimate, a firm recognition of what your safe cap is and an understanding of how you will build resiliency into your plans (including combinations of insurance, alternative living arrangement, reduction in non-discretionary outlays etc.)

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Re: What is a reasonable decline in spending as we age?

Post by joebh » Mon Jun 06, 2016 12:10 pm

TheTimeLord wrote: First 10 years - 100%
Next 10 years - 83%
Next 7 years - 75%
I die
Last 11 years - 67%
You can propose any percent that makes you happy, as long as you are willing to live with the consequences. In this case, your goal is to spend as much as possible in your "earlier" years and still have "enough" left over for your later years.

If your wife is willing to live on 67% (or less) after you die 11 years before her, then that makes sense. If she needs or wants 70%, then a mistake was made.

It seems silly to me to attempt to be so precise with so many unknowns (year of your death, year of her death, what you'll actually need/want so many years out, etc.) and use that to front-load your expenditures. The change of any one of these variables could throw your plan in jeopardy, with no way to recover.

But we all make decisions, and all live with the consequences.

Good luck.

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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 12:57 pm

joebh wrote:
TheTimeLord wrote: First 10 years - 100%
Next 10 years - 83%
Next 7 years - 75%
I die
Last 11 years - 67%
You can propose any percent that makes you happy, as long as you are willing to live with the consequences. In this case, your goal is to spend as much as possible in your "earlier" years and still have "enough" left over for your later years.

If your wife is willing to live on 67% (or less) after you die 11 years before her, then that makes sense. If she needs or wants 70%, then a mistake was made.

It seems silly to me to attempt to be so precise with so many unknowns (year of your death, year of her death, what you'll actually need/want so many years out, etc.) and use that to front-load your expenditures. The change of any one of these variables could throw your plan in jeopardy, with no way to recover.

But we all make decisions, and all live with the consequences.

Good luck.
So you believe the residual mid 6 figure buffer will be insufficient for her to make adjustments? If I don't die then we just add back in my SS to the equation and that should be sufficient. I chose to have one of us die in the model so we would lose that income source and could verify the survivor would have sufficient funds. I am not sure why having estimates is considered an attempt at true precision. About the only true hard and fast assumptions are that we will be more active and want to travel more in the remainder of our 50s and 60s than our 70s and 80s and that one of us will die in our 80s and the other will live into their 90s. So I think I am missing the reasons for your concern.
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Re: What is a reasonable decline in spending as we age?

Post by 1210sda » Mon Jun 06, 2016 1:47 pm

joebh wrote: If your wife is willing to live on 67% (or less) after you die 11 years before her, then that makes sense. If she needs or wants 70%, then a mistake was made.

It seems silly to me to attempt to be so precise ....
1. What is the right percent for a survivor ? Certainly not 100% of what both of you were spending. Unlikely not 50%, since some expenditures do not go away when one spouse dies. The mid point between 100% and 50% is 75%. So it's each persons call, but somewhere around 75% is bound to be close.

2. The degree of precision desired is up to each one of us. Keep in mind that this is for the planning stage. It's purpose is to give you a target or a guideline as to what you can expect. That's all, not a rigid schedule that must be adhered to down to the last penny.

1210

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Re: What is a reasonable decline in spending as we age?

Post by SeeMoe » Mon Jun 06, 2016 3:14 pm

We've been retired over 20 years and are in our mid 70's. Our yearly cost of (good) living has steadily increased but still only accounts for about 60% of pension income and RMD's. That despite a hefty entrance fee into a 5 star CCRC 5 years ago, and significant monthly rent.( lucky us? Yes, but we " made" our luck happen too!) we trade in our Acura MDX, RDX's every three years and spend a few weeks in S. Florida in the winter. Used to travel a lot, but to much hassle now. We could cut down on expenses, but have the luxury of living well as we age while continuing to invest excess pension monies, or just letting the short term kitty expand. . A lot of the preceding is because of our investments with Vanguard over the years and advice received from them on how to do it!
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Re: What is a reasonable decline in spending as we age?

Post by joebh » Mon Jun 06, 2016 3:48 pm

1210sda wrote:
joebh wrote: If your wife is willing to live on 67% (or less) after you die 11 years before her, then that makes sense. If she needs or wants 70%, then a mistake was made.

It seems silly to me to attempt to be so precise ....
1. What is the right percent for a survivor ?
Obviously, 74.875% is the right percent.
2. The degree of precision desired is up to each one of us. Keep in mind that this is for the planning stage. It's purpose is to give you a target or a guideline as to what you can expect. That's all, not a rigid schedule that must be adhered to down to the last penny.
Yup.

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Re: What is a reasonable decline in spending as we age?

Post by Youngblood » Mon Jun 06, 2016 4:18 pm

Sheepdog wrote:I don't understand why one would plan on a decline in spending as they age. If may happen, it may not, why plan on it being less? I don't need charts to figure the future. I would rather plan on living a long life and enjoying it. In October I will have been retired 18 years. I haven't spent less (more data coming). I still go to theater (for example, we drove 75 miles to see a show last weekend)and see shows locally and distant thruout the year. We eat in restaurants more so that cost is up. I still buy Indy Colts season tickets and attend all games....they aren't cheap, nor are our Symphony and theater season tickets. We still travel although my last major cruise was 2 years ago (10 day Western Caribbean in a balcony stateroom), but we are planning on a cruise this fall to Canada. Why not? We each buy new cars every 8 or 9 years with my wife's planned for 2017 and mine in 2019 and they certainly aren't lower cost. We have home maintenance and remodeling expenses. they don't change. Medical costs are more expensive, not less. For example, hearing aids cost $2200 each, dental work can be way up there.

This is our spending history. Do I match any average? Will you? In my last year of employment, 1998, when I was 65, our spending totaled $57,831, not including taxes. (Our income tax in retirement was much lower, so I have not included them in this history.) I had no debts at retirement.
I am using 5 year averages since individual years vary so much.

Our spending history (income tax is not included)
1998, last year employed, $57,831
1999-2003 $57,850 average (1 auto purchased)
2004-2008 $59,019 average (0 auto purchased)
2009-2013 $67,514 average (2 autos purchased)
2014-2015 $67,451 average (note 2 years only)

I certainly did not have reduced spending. My standard of living has not changed, not at all. I may look for bargains to lower costs, like going to Aldi for groceries. (Lower costs temper inflation.) Spending in retirement can be quite different than when employed because of discretionary spending (more or less), but I don't think ours were.
My plan is still living a longer life and enjoying it. I wouldn't plan for a spending decline.
I couldn't agree more!
I wish you were my neighbor though and I could take lessons from you on how to spend more. But, I seem to be happy to just spend as I do. Nice home, nice cars, enough food, no money worries, gym membership...

All this complicated planning for the unknowable is too much like going back to work.

Death/certain when/uncertain

Now, planning for retirement was a different story.

BTW Sheepdog, when you add income tax to your spending history it gets ugly, doesn't it?

YB
"I made my money by selling too soon." | Bernard M. Baruch

michaeljc70
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Re: What is a reasonable decline in spending as we age?

Post by michaeljc70 » Mon Jun 06, 2016 4:34 pm

I plan on retiring early (50ish) so I plan on spending the same or more than when working for at least the first 10-20 years. I will have more time to socialize and will probably eat out more and go to more entertainment type things (shows, concerts, etc.) I will also travel more.

People say you save so much not working, but I don't buy it. I don't spend a lot on work clothes or commuting. I would still have a car whether I work or not (I guess it will have less miles, but I don't drive much anyway). Obviously you pay less in taxes (typically) and need to account for that.



I guess it really depends on your personality and what you hope to do in retirement. My parents travel no more than when working and probably spend less.

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Re: What is a reasonable decline in spending as we age?

Post by jebmke » Mon Jun 06, 2016 4:41 pm

Youngblood wrote:when you add income tax to your spending history it gets ugly
IMO taxes should always be included in spending. In some cases, it might be the largest item in the budget. Also, leaving it out might lead you to consider that you have no control over it.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: What is a reasonable decline in spending as we age?

Post by Levett » Mon Jun 06, 2016 4:46 pm

Sheepdog wrote:

"I wouldn't plan for a spending decline."

Now in year 16 of retirement, neither would I!

Lev

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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 5:04 pm

Levett wrote:Sheepdog wrote:

"I wouldn't plan for a spending decline."

Now in year 16 of retirement, neither would I!

Lev
Are you speaking from preretirement levels or just through the course of retirement? Has you activity leave remained constant through your retirement? Do you travel frequently in your retirement? Just trying to understand you answer.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

curmudgeon
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Re: What is a reasonable decline in spending as we age?

Post by curmudgeon » Mon Jun 06, 2016 5:18 pm

Averages only apply to average people. We will all have our own course, which is only somewhat predictable. Some people will largely continue with their normal life, others have big plans for spending. In general, I like planning the near term in more detail, and leaving the longer range outlook rather fuzzy. Re-evaluate and adjust every couple of years. It's hard to predict whether you will get burned out with travel after a few years, or whether you will just want to shift to higher levels of luxury and service to accomodate your aging. For ourselves, we are penciling in roughly flat spending up until around age 80. As we get further along, we may have a clearer picture, but I can envision shifting to high-end cruise ships or footing the bill for younger members of the family keeping the expenses up even if we spend less time traveling.

For me, what I'm thinking of as "early retirement" phase is the time before I draw SS (target age 70). If I didn't have a legacy interest, I'd probably look to the following plan. The amount of our savings that I'm willing to spend in ER relates to how much of a comfortable lifestyle the SS benefit (plus paid off house) would support. If our baseline at age 70 is covered, then it is a matter of how to split up the money for luxuries (because it would still be nice to have the luxuries after age 70). The house is the LTC reserve. As a starting point, divide up the retirement savings into 1/3 bucket for post age 70, and 2/3 for ER. The plan for the 1/3 is to split it into his and hers SPIAs around age 70. This deals with the "one vs two" spending around unpredictable lifespans. The 2/3 then gets invested quite conservatively, maybe 30/70, and just drawn down fairly evenly year by year, with some adjustments for medicare and other variations.

Since I do have a legacy interest, in my case I'm thinking more along the lines of spending 1/3 in 12 years of ER (or perhaps 1/3 plus investment gains), and keeping the rest invested with a long-term horizon. When we start drawing SS, we will probably live more or less off of that plus investment returns.

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Re: What is a reasonable decline in spending as we age?

Post by Levett » Mon Jun 06, 2016 5:32 pm

Hi TimeLord,

My answer is basically "yes" to your questions.

I'm a relatively "early" retiree (I retired 16 years ago at age 58) and have not yet hit the slow-go phase, but I can hear its footsteps! :annoyed

lev

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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 5:46 pm

Levett wrote:Hi TimeLord,

My answer is basically "yes" to your questions.

I'm a relatively "early" retiree (I retired 16 years ago at age 58) and have not yet hit the slow-go phase, but I can hear its footsteps! :annoyed

lev
Bully for you. I am reasonable sure by 70 (much less 74) I will not have the desire to do the travel I am planning for the first several years of my retirement. It won't go away but I am pretty sure the pace and type of travel will change.
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Re: What is a reasonable decline in spending as we age?

Post by Sheepdog » Mon Jun 06, 2016 5:50 pm

Youngblood wrote:

BTW Sheepdog, when you add income tax to your spending history it gets ugly, doesn't it?

YB
No, income tax is not ugly, to the contrary. I paid none in this year's tax return and only $3000 total in the last 13 years on my near $1M invested and SS received to cover my about $65K to $77K spending. Here's how, if you care to know:
Planning taxes, or little taxes, was a plan I had when I retired in 1998. It worked. This was and is the basic program:
I set my goal to reduce taxable income as much as possible before RMDs. When someone asks me what they should spend first in retirement, it is taxable. I did take Social Security at age 65. Maybe I should have waited, but it worked out fine for me at 65.
1. First, I converted my modest pension lump sum to an IRA, so it became tax deferred and it grew till RMDs would be required.
2. I had the advantage of purchasing I Bonds in larger quantities than you can today. That became about 20% of my investment worth. That increased my tax deferred accounts by reducing taxable investments when I purchased them. I have not needed most of those I Bonds, so they have grown with no tax.
3. In those first 5 years in retirement, through age 70, I converted about 22% of my IRAs to Roth IRAs (4.5% a year) in the period when my tax rates would be much lower than before retirement. The tax bill was not huge for the future benefit of no Roth taxation for years to come.
4. In those first 5 years before RMD, beyond my SS income, I lived off of the rest of my taxable accounts so that taxable investments were reduced considerably when I reached 70.5..
To meet expenses in future years, I would need more than RMDs and SS to meet my annual expenses. I would take distributions from the IRAs until taxes would be due, then I would take from the tax free Roths, if needed. I use the previous year's income tax software to estimate each year's tax bite.
So, again, from age 65 to 70, I paid some taxes during the Roth conversion, with reduced amount each year from 66 to 70. At 70, it was near zero. The result has been that I have paid very little federal income tax since age 70 (13 years) and some years it has been zero like last year's.
Over the years the investments have grown in value and the investment mix has morphed to 36% traditional IRA, 34% Roth IRA, 21% I bonds and the only taxable, 9% short term bonds, cash and CDs.
People should not say everything they think. They should think about everything they say.

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Re: What is a reasonable decline in spending as we age?

Post by delamer » Mon Jun 06, 2016 5:59 pm

A few thoughts:

First, there is a base amount that a couple or single needs to live on, given individual life styles. So I'd look at that base and then maybe apply declining percentages to optional spending.

Second, I have a friend whose mother lived comfortably (and with family) on probably $25K/year in early and middle retirement. Now she needs assisted living care and the first place she was in cost $10K/month. (Her family has since found a less expensive place.)

The declining percentages are not predictive when you have a shock like that. The OP mentioned a house that could be sold, but even the usefulness of that depends on how much the house is worth relative to long-term care costs.

Third, while I have seen gradual declines in seniors in my family, I have also seen people go from 80% capacity to 20% capacity (capacity being ability to live life in their preferred way) overnight.

So I have my doubts as to whether the estimated declining percentages are really of much value. The idea that others have mentioned of reevaluating every few years is more useful than trying to plan out 30 years. And any plan needs to provide for shocks.

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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 6:13 pm

delamer wrote: So I have my doubts as to whether the estimated declining percentages are really of much value. The idea that others have mentioned of reevaluating every few years is more useful than trying to plan out 30 years. And any plan needs to provide for shocks.
I agree reevaluating every few years make but I see value in trying to project expenses before you enter retirement if for no other reason than to determine if you are at a place you can retire if this is the way things work out. My plan actually will work down to a 3% real rate of return and if I get 4% then I will have significant excess. I have dealt with 2 relatives who had to go into nice assisted living facilities, but no where near $10K/month. I feel I have covered the emergency bases as well as I can in planning, but life can surprise. From all the responses the thing that has surprised me is how few seem to have had a real flurry of activity in early retirement then settled to a routine. Perhaps I won't either once I have that much time, won't feel the need to hurry from place to place. It will be interesting to see once it happens. Thanks for all the insight.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

ralph124cf
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Re: What is a reasonable decline in spending as we age?

Post by ralph124cf » Mon Jun 06, 2016 9:22 pm

Sheepdog wrote:
Youngblood wrote:

BTW Sheepdog, when you add income tax to your spending history it gets ugly, doesn't it?

YB
No, income tax is not ugly, to the contrary. I paid none in this year's tax return and only $3000 total in the last 13 years on my near $1M invested and SS received to cover my about $65K to $77K spending. Here's how, if you care to know:
Planning taxes, or little taxes, was a plan I had when I retired in 1998. It worked. This was and is the basic program:
I set my goal to reduce taxable income as much as possible before RMDs. When someone asks me what they should spend first in retirement, it is taxable. I did take Social Security at age 65. Maybe I should have waited, but it worked out fine for me at 65.
1. First, I converted my modest pension lump sum to an IRA, so it became tax deferred and it grew till RMDs would be required.
2. I had the advantage of purchasing I Bonds in larger quantities than you can today. That became about 20% of my investment worth. That increased my tax deferred accounts by reducing taxable investments when I purchased them. I have not needed most of those I Bonds, so they have grown with no tax.
3. In those first 5 years in retirement, through age 70, I converted about 22% of my IRAs to Roth IRAs (4.5% a year) in the period when my tax rates would be much lower than before retirement. The tax bill was not huge for the future benefit of no Roth taxation for years to come.
4. In those first 5 years before RMD, beyond my SS income, I lived off of the rest of my taxable accounts so that taxable investments were reduced considerably when I reached 70.5..
To meet expenses in future years, I would need more than RMDs and SS to meet my annual expenses. I would take distributions from the IRAs until taxes would be due, then I would take from the tax free Roths, if needed. I use the previous year's income tax software to estimate each year's tax bite.
So, again, from age 65 to 70, I paid some taxes during the Roth conversion, with reduced amount each year from 66 to 70. At 70, it was near zero. The result has been that I have paid very little federal income tax since age 70 (13 years) and some years it has been zero like last year's.
Over the years the investments have grown in value and the investment mix has morphed to 36% traditional IRA, 34% Roth IRA, 21% I bonds and the only taxable, 9% short term bonds, cash and CDs.
This may make sense for your financial situation, but for someone whose government guaranteed SS and pension plus RMDs at age 70 would put them solidly into the 28% bracket, it is inefficient tax wise. It makes more sense to at least fill up the 15% tax bracket with either withdrawals or ROTH conversions to avoid higher taxes later.

Ralph

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patriciamgr2
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Re: What is a reasonable decline in spending as we age?

Post by patriciamgr2 » Mon Jun 06, 2016 9:43 pm

If you both choose to move to a CCRC in advance of a medical emergency, selling your home can fund the entry fee. But, it is not atypical for one spouse suddenly to need to be in a nursing home (think: stroke) while the other may wish to maintain the family home. I'd suggest running numbers on (1) home health care; (2) 1 spouse in assisted living while other remains in home; and (3) entry fee & monthly fees for a CCRC in your area you would be willing to consider.

Personally, I think a widow may spend more after the husband dies (food costs may decline, but maintenance, etc. costs increase because of need to hire workers).

The decline in spending you are projecting for your middle retirement years may occur. I would project, however, a very significant increase from those lower levels to cover expenses as you age (depends on your family history, but I personally used age 82 for planning purposes & built in spending for periodic home health care & then CCRC fees.) Health care, assisted living etc. costs have increased more than general inflation. Instead of playing with percentages, look up current costs in your retirement area.

Good Luck & fingers crossed that none of us need any of this unpleasant health care stuff!

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Will do good
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Re: What is a reasonable decline in spending as we age?

Post by Will do good » Mon Jun 06, 2016 10:08 pm

Sheepdog wrote:
Youngblood wrote:

BTW Sheepdog, when you add income tax to your spending history it gets ugly, doesn't it?

YB
No, income tax is not ugly, to the contrary. I paid none in this year's tax return and only $3000 total in the last 13 years on my near $1M invested and SS received to cover my about $65K to $77K spending. Here's how, if you care to know:
Planning taxes, or little taxes, was a plan I had when I retired in 1998. It worked. This was and is the basic program:
I set my goal to reduce taxable income as much as possible before RMDs. When someone asks me what they should spend first in retirement, it is taxable. I did take Social Security at age 65. Maybe I should have waited, but it worked out fine for me at 65.
1. First, I converted my modest pension lump sum to an IRA, so it became tax deferred and it grew till RMDs would be required.
2. I had the advantage of purchasing I Bonds in larger quantities than you can today. That became about 20% of my investment worth. That increased my tax deferred accounts by reducing taxable investments when I purchased them. I have not needed most of those I Bonds, so they have grown with no tax.
3. In those first 5 years in retirement, through age 70, I converted about 22% of my IRAs to Roth IRAs (4.5% a year) in the period when my tax rates would be much lower than before retirement. The tax bill was not huge for the future benefit of no Roth taxation for years to come.
4. In those first 5 years before RMD, beyond my SS income, I lived off of the rest of my taxable accounts so that taxable investments were reduced considerably when I reached 70.5..
To meet expenses in future years, I would need more than RMDs and SS to meet my annual expenses. I would take distributions from the IRAs until taxes would be due, then I would take from the tax free Roths, if needed. I use the previous year's income tax software to estimate each year's tax bite.
So, again, from age 65 to 70, I paid some taxes during the Roth conversion, with reduced amount each year from 66 to 70. At 70, it was near zero. The result has been that I have paid very little federal income tax since age 70 (13 years) and some years it has been zero like last year's.
Over the years the investments have grown in value and the investment mix has morphed to 36% traditional IRA, 34% Roth IRA, 21% I bonds and the only taxable, 9% short term bonds, cash and CDs.
Slydog :sharebeer

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Re: What is a reasonable decline in spending as we age?

Post by TN_Boy » Mon Jun 06, 2016 10:09 pm

Sheepdog wrote:
AlohaJoe wrote:
Your own numbers show you are wrong. Your spending has dropped substantially, as has your standard of living.

If your spending had not reduced then you should be spending $84,887 this year. You are nearly $20,000 off that.
Hello, Aloha Joe. Sorry, that isn't so. Are you being judgmental? You can't read standard of living from my data, not mine, not at all, I promise you. As I said, I may look for bargains now. That is not lowering standard of living. No, I don't buy a lot of technology...I didn't then either, as I don't want or need it and that is not lowering my standard of living, not mine...maybe yours. I don't buy new expensive housing as I am living in the same abode for the last 44 years. I travel as much domestically and internationally. I buy autos as often. I eat out more, look for entertainment more, both of which increases my standard of living. You are judging without knowledge.
Sheepdog,

With all due respect, I don't understand your answer. AlohaJoe might have been a tad presumptuous saying your standard of living has dropped, but his other point, that your spending in real dollars has dropped substantially seems 100% correct and you didn't address that point. From your numbers, with inflation-adjusted values:

Code: Select all

1998, last year employed, $57,831                   - $84,887.75 in 2016 dollars
1999-2003 $57,850 average (1 auto purchased)        - $78,154.99  (converting 2001 to 2016 $)  92% of 1998 spending
2004-2008 $59,019 average (0 auto purchased)        - $70,044.37  (converting 2006 to 2016 $)  82.5% of 1998 spending
2009-2013 $67,514 average (2 autos purchased)       - $71,812.66  (converting 2011 to 2016 $)  85% of 1998 spending
2014-2015 $67,451 average (note 2 years only)       - $68,089.60  (converting 2015 to 2016 $)  80% of 1998 spending
(inflation calculator: http://data.bls.gov/cgi-bin/cpicalc.pl)

This is not a criticism, but I don't understand why you say "I certainly did not have reduced spending." Could you explain? It certainly looks reduced to me.

To the OP:

For what it is worth, I imagine our spending will drop after we retire and as we move into our late 60s and 70s. I know almost no one that doesn't slow down some by then and several studies indicate spending typically goes down at that time of life. Travel and outdoor activities tend to be reduced. But given that health care expenses are unknown, I can't really see planning for that ..... and you might get lucky and still be wanting to travel the globe at 85. Hence when doing retirement planning I don't really assume that costs will drop in later years.

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TheTimeLord
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Re: What is a reasonable decline in spending as we age?

Post by TheTimeLord » Mon Jun 06, 2016 10:10 pm

patriciamgr2 wrote:If you both choose to move to a CCRC in advance of a medical emergency, selling your home can fund the entry fee. But, it is not atypical for one spouse suddenly to need to be in a nursing home (think: stroke) while the other may wish to maintain the family home. I'd suggest running numbers on (1) home health care; (2) 1 spouse in assisted living while other remains in home; and (3) entry fee & monthly fees for a CCRC in your area you would be willing to consider.

Personally, I think a widow may spend more after the husband dies (food costs may decline, but maintenance, etc. costs increase because of need to hire workers).

The decline in spending you are projecting for your middle retirement years may occur. I would project, however, a very significant increase from those lower levels to cover expenses as you age (depends on your family history, but I personally used age 82 for planning purposes & built in spending for periodic home health care & then CCRC fees.) Health care, assisted living etc. costs have increased more than general inflation. Instead of playing with percentages, look up current costs in your retirement area.

Good Luck & fingers crossed that none of us need any of this unpleasant health care stuff!
I do have actual numbers, I just translated them to percentages to see if others followed the same pattern or expense reduction.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

AlohaJoe
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Re: What is a reasonable decline in spending as we age?

Post by AlohaJoe » Mon Jun 06, 2016 11:37 pm

TN_Boy wrote:
Sheepdog wrote:
AlohaJoe wrote:
Your own numbers show you are wrong. Your spending has dropped substantially, as has your standard of living.

If your spending had not reduced then you should be spending $84,887 this year. You are nearly $20,000 off that.
Hello, Aloha Joe. Sorry, that isn't so. Are you being judgmental? You can't read standard of living from my data, not mine, not at all, I promise you.
With all due respect, I don't understand your answer. AlohaJoe might have been a tad presumptuous saying your standard of living has dropped, but his other point, that your spending in real dollars has dropped substantially seems 100% correct and you didn't address that point.
I'm not making any value judgment at all, I've reduced (and raised) my standard of living several times over my life and it didn't make me a better or worse person.

From the original reply, "I certainly did not have reduced spending. My standard of living has not changed, not at all." It seems a safe bet that if SheepDog was so wrong about something as easy to check and verify as reduced spending on an inflation-adjusted basis, it is also pretty likely their standard of living has also dropped. Also, on the surface, it is hard to imagine how to cut out 21% of one's spending without changing standard of living.

SheepDog's own data about spending is extremely average and exactly what a retirement research would have predicted he did. There's nothing wrong with that but there's no reason to pretend that we are all outliers.
Last edited by AlohaJoe on Tue Jun 07, 2016 12:58 am, edited 1 time in total.

Dave C.
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Re: What is a reasonable decline in spending as we age?

Post by Dave C. » Tue Jun 07, 2016 12:55 am

Toons wrote:I did all sorts of financial planning,spreadsheets ,,,forecasts etc, before retirement 5 years ago.
Current age, 65
Now,I just enjoy each day as it comes.
Excluding a couple of large purchases we had planned for,
we find ourselves spending 35-40k per year.
Have not found the need to draw down any investments to fund the lifestyle,,as of yet.
Being Debt Free and having downsized have both been huge "pluses"
:D :happy
+1. Lots of people enjoy and get peace of mind out of planning, developing spread sheets, dissecting spending plans, evaluating income streams and planning down to a fine decibel point. It's guess work.
I certainly have done my due diligence. I am 64 and married to a spry 63 year old. I earned good money, saved a lot, lived below our means and ended up with a healthy bunch of cash. Now it's pretty much tucked away In an asset allocation of 50%/50%, in a few conservative index funds.

The point of my little message is Toons point number three. "Now, I just enjoy each day as it comes".

My day is pretty much made when I wake up and realize I'm on the right side of the grass.
Easy does it/Live & Let Live/One day at a time. Thanks Bill.

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Re: What is a reasonable decline in spending as we age?

Post by patriciamgr2 » Tue Jun 07, 2016 1:50 am

So, TimeLord: assuming your percentage calculations account for inflation, am I correct in that you believe you'll be spending significantly more on travel, etc. in your early years than you'll be spending on health care in your later years? A nursing home for 1 spouse can run $60K per year; that's in addition to your normal expenses of maintaining a home for the other spouse.

I traveled quite a bit in my early retirement years, but I still think expenses of old age could be several multiples of anything I spent in my early retirement. In my limited experience so far, only singles who experienced sudden death had a huge drop in their final years. Between drug costs not fully covered by insurance for conditions like cancer to home health care or assisted living--old age can be expensive. The membership of this Forum probably haven't focused on these issues unless they have aged parents.

Personally, I can see how a couple could spend less (not considering inflation) in their late 70's than they do in their travel-heavy late 50's; I can't see how that spending pattern can be guaranteed through the death of the second spouse. Getting these numbers wrong may leave the surviving spouse in a really difficult position.

Best Wishes.

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Re: What is a reasonable decline in spending as we age?

Post by freebeer » Tue Jun 07, 2016 2:41 am

TheTimeLord wrote:In planning for my retirement the most important thing to me is maximizing what we can do in the early years while providing the ability to pay for our care in the later years. To this end I have developed a basic spreadsheet modeling our after tax income from full retirement to death. I mostly focus on the 3.5% (I have a range from 3%-4%) with a 20% effective tax rate. I have our need for Net Income diminishing over time from a 100% in the first decade of retirement to 67% at the end supporting my wife alone and her leaving a mid-6 figure inheritance to whoever. This plan does include selling our house at the point I project going into assisted living. So here are my percentages through the years below, do they look reasonable to you that the need for income would decline in such a manner as we age? Thanks for the feedback.

First 10 years - 100%
Next 10 years - 83%
Next 7 years - 75%
I die
Last 11 years - 67%
Might it be simpler, at least while we have had and can expect a lengthy period of relatively low inflation in the U.S. - to model this as simply spending a fixed amount of nominal dollars per year, thus realizing a decreasing spending in real dollars? This would have the charm of mapping well to using an SPIA to generate any necessary income. Or as a hybrid, modeling that a portion of your spending adjusts with inflation (e.g. Social Security) while the rest (e.g. SPIA) does not. Of course you can get inflation-adjusting SPIAs but they seems to be priced inefficiently.

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