Spending profile in retirement

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corn18
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Spending profile in retirement

Post by corn18 »

What do you use as a spending profile in retirement? I don't don't think the SWR method is what I want to use. My current plan in firecalc and The Flexible Retirement Planner is:

55-60: $105k base spending (current spending), $25k travel
61-70: $95k base spending (kids are off the dole), $25k travel
71-80: $75k base spending, $15k travel
81-death: $75k base spending

Is this reasonable or should I just plan on spending @ SWR until I die? What have those that are retired seen in their lifecycle spending?
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ResearchMed
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Re: Spending profile in retirement

Post by ResearchMed »

corn18 wrote: Sat Jul 14, 2018 7:34 pm What do you use as a spending profile in retirement? I don't don't think the SWR method is what I want to use. My current plan in firecalc and The Flexible Retirement Planner is:

55-60: $105k base spending (current spending), $25k travel
61-70: $95k base spending (kids are off the dole), $25k travel
71-80: $75k base spending, $15k travel
81-death: $75k base spending

Is this reasonable or should I just plan on spending @ SWR until I die? What have those that are retired seen in their lifecycle spending?
Don't forget about extra health care costs later in life.

We are sort of figuring that what we aren't going to spend on travel (a relatively large amount) from earlier would go towards the care, plus other amounts planned for that.

Also, we figure we might also spend a bit more per trip (but fewer trips) later in retirement, if we need extra help while traveling (e.g., bringing someone with us, if it's that or not traveling at all anymore...).

RM
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The Wizard
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Re: Spending profile in retirement

Post by The Wizard »

I don't like the OP's decline in spending as time goes on.
I've managed to have my income increase most years in retirement thus far (five).

Now I don't actually "spend" all of my income each year in retirement. Some goes into my new car fund and will likely get spent later.

I'd be happy to increase my income and spending something like 4-5% per year indefinitely...
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corn18
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Re: Spending profile in retirement

Post by corn18 »

corn18 wrote: Sat Jul 14, 2018 7:34 pm What do you use as a spending profile in retirement? I don't don't think the SWR method is what I want to use. My current plan in firecalc and The Flexible Retirement Planner is:

55-60: $105k base spending (current spending), $25k travel
61-70: $95k base spending (kids are off the dole), $25k travel
71-80: $75k base spending, $15k travel
81-death: $75k base spending

Is this reasonable or should I just plan on spending @ SWR until I die? What have those that are retired seen in their lifecycle spending?
To be more accurate, my base spending throughout is $75k. This is based on my current budget without new cars, house repairs and other irregular spend. It does not include taxes. It does include health care, which for me is ridiculously affordable as we have Tricare for life from my military retirement.

So, this is what the spend plan actually looks like:

55-60: $130k: $75k base spending, $30k fun money, $25k travel
61-70: $120k: $75k base spending, $25k fun money, $25k travel
71-80: $90k: $75k base spending, $15k travel
81-death: $75k base spending

ON EDIT:

To be clear, my SWR spend amount is $140k before taxes with taxes estimated at 12% effective. So $123,200 after taxes. That puts me a little short at the beginning and way over at the end. Just trying to reconcile this in my head so I can justify spending more at the beginning before I lose continence.
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Sandtrap
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Re: Spending profile in retirement

Post by Sandtrap »

The Wizard wrote: Sat Jul 14, 2018 7:54 pm I don't like the OP's decline in spending as time goes on.
I've managed to have my income increase most years in retirement thus far (five).

Now I don't actually "spend" all of my income each year in retirement. Some goes into my new car fund and will likely get spent later.

I'd be happy to increase my income and spending something like 4-5% per year indefinitely...
+1
Healthcare costs and other personal and financial "black swans" can actually make for rising costs in retirement.
And, . . it's a huge reality check when it happens. :shock:

Far better to plan for rising costs and higher returns in retirement and be prepared for whatever happens.
Sort of a plan for the worse and hope for the best scenario.

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3504PIR
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Re: Spending profile in retirement

Post by 3504PIR »

I’ve always looked at my budget in the terms of fixed and variable costs. If you are spending around $10,000 a month after taxes, per the earlier post, is that your overall budget? I’m confused by the term spending in this context. Do you have obligations of $10,000 per month or does spending refer to what I consider variable costs like dining out, or a combination. Is the travel budget inclusive or exclusive of the “spending?”

Sorry for my confusion, I’m just trying to grasp the context.
Derpalator
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Re: Spending profile in retirement

Post by Derpalator »

I appreciate OP for questioning the first order approximation of spending in retirement as constant per year in real terms. People at ninety simply don't spend the same as those at fifty. During one of my first visits with my "free" Fidelity advisor, she introduced me to the "gogo, slogo, and nogo" stages of retirement and I have since modeled my pending retirement spending accordingly (in addition to constant real spending). Countless hours spent massaging those models has resulted in better understanding of choices for when to pull the trigger and retire. But I wonder also if one should not also include age/mortality heuristics in one's Monte Carlo calculations? After all, you cannot spend it if you are dead. Below are two links that ponder those same questions..

http://www.efficientfrontier.com/ef/901/hell3.htm

https://assetbuilder.com/knowledge-cent ... end-freely
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Sheepdog
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Re: Spending profile in retirement

Post by Sheepdog »

How can people plan a set spending budget and investment withdrawal amount for their entire retirement? I know I couldn't. When I began retirement withdrawals 20 years ago, I planned a to have an annual average percentage withdrawal, not a set amount as I knew that there would be years I would want or need to spend more than in others. I was going to live off of my investments and SS with no pension. There would be no way will I need to spend the same amount each year, increased for inflation or not. After all , I'm not going to buy a new automobile, buy a lake cottage, take a $20K trip, have a major house maintenance or remodeling project, every year (all of which has been my experience.) Why would I want to plan a set amount or percentage? And that has been the case. My top percentage withdrawal year was 10% and the lowest was 1.93"%, but the average has been close to my beginning retirement plan of 4.5% average per year, not adjusted for inflation with a hopefully increased portfolio value to cover my cost of living increases. (Withdrawals have averaged 4.59% a year.)
I live in a low cost of living area, thankfully. Living in a HCOL would have given me difficulties which I can only imagine. I have lived in the same paid for house the entire time. We have purchased new cars, taken nice travel, but not extravagant) at home and abroad, had several remodeling jobs on the home, had some higher cost medical and dental expenses.
My spending in any one year varied considerably, low to high. For example,highest spending year (2011) which was close to my 2017 expenses was 76% higher than my lowest (2002) My investment value has increased enough to cover MY inflation. (MY inflation in retirement has been less than the CPI, by the way.)

edit to add:
How could I have a "spending profile in retirement"? We are still spending at my age 85 about the same just differently. I hadn't looked at this until now. In my first 3 full years retired (1999 to 2001) in this low cost of living area we spent $180,625. In our last 3 years (2015 to 2017) we spent $187,439. Larger expense items (which I make notes of especially each year) in those first 3 years included only one new car. In the last 3 years noted, we did not buy a new car (we will this year though), but we remodeled a bath, had higher dental expenses and increased charitable donations. Both of those time periods included at least one cruise or trips. As I said, our inflation is much less than the CPI.
Last edited by Sheepdog on Sun Jul 15, 2018 7:28 am, edited 1 time in total.
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carolinaman
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Re: Spending profile in retirement

Post by carolinaman »

I retired at age 66 almost 8 years ago. Our total spending has not changed that much from my working years. We have spent a little more on travel, maybe an extra $5k every other year. A major expense for us has been home maintenance costs. Our home is 44 years old and is on 2 acres of wooded land. It has been well maintained. Nonetheless, we have incurred some major costs, such as $6k new HVAC, $3k new ductwork, new storm drain and other moisture remediation efforts $4k, replacement doors, and some major remodeling which was optional $40k. These costs were not a surprise because those things happen.

One cost that did surprise us was tree trimming and removal. We have had to remove several very large trees and do a lot of tree trimming from growth near our house, plus we had a bamboo invasion from our neighbor. I am guessing we have spent $12 to $15k on tree work. When I was younger, I would have done most of that myself. That is no longer an option.

We have been blessed on the health care front. I have full health coverage at no cost from my former employer. DW has Medicare and associated plans. The only major health expenses have been in dental. However, our accumulated health cost per year including insurance and co-pays is usually $10 to $12k.

Forgive my rambling, but the point I would like to make is to plan things like I cited and also for major capital expenses like cars. A budget can look pretty good until you factor in extraordinary items like these. In addition, hopefully not but life may bring you some of the so called black swans. Best wishes.
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Re: Spending profile in retirement

Post by tennisplyr »

I'm 7 years into retirement. Have said this many times, I spend what I need when I need it with an eye on my total portfolio. There are way too many moving parts and unknowns to worry about, but that's me.
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smitcat
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Re: Spending profile in retirement

Post by smitcat »

Perhaps consider these 'automated' options that are available in the extended IORP planner due to the diligence of the developer.....

Spending Strategies
The Traditional Spending Model (TSM), used by most retirement planners including ORP, is to assume or compute an initial spending level for the first year of retirement and index it to the rate of inflation thereafter. The assumption is that spending will be constant throughout retirement with inflation being the only adjustment. The Spending column of ORP's Withdrawal Report will show well behaved constant growth when TSM is selected.
Four researchers have studied retirement demographic data and concluded that younger retirees are hard pressed to stay within their spending budgets while older retirees' actual spending is 40% to 50% below their early retirement spending levels. The four publications include procedures for computing spending plans that reflect the observed retirement spending patterns. ORP offers these four approaches to spending during retirement.
Traditional Spend Model (TSM): The TSM is where ORP computes maximum initial spending for the first year of retirement and adjusts it for all subsequent years by the spending inflation rate specified elsewhere on ORP's input form.
Reality Retirement Planning: In his 2005 paper Reality Retirement Planning: A New Paradigm for an Old Science, Ty Bernicke reviewed the U.S. Bureau of Labor's Consumer Expenditure Survey and found that retirees between age 60 and 70 spend significantly more each year of retirement while people ages 75 and older tend to spend half of what they spent between the ages of 45 and 55. Only health care expenditures increase as people age. Everything else -- including entertainment, housing costs, food and transportation -- decreases, resulting in an overall decline in spending before adjustments for inflation. Bernicke published a table of spending reduction percentages gleaned from this source. When you select this option ORP decreases the inflation rate by these percentages early in retirement. ORP's increases spending by the rate of spending inflation after age 80.
Changing Consumption: Casting a wider net, David Blanchett in Estimating the True Cost of Retirement uses different demographic data sources to develop a single function that describes the curve of retirement spending. Selecting this option reduces the inflation rate by values from his function. ORP's optimal spending schedule will show increased spending early in retirement and toward the end with reduced spending in mid plan. Normally Blanchett's values reduce the increase in spending caused by inflation. A zero inflation rate will cause retirement spending to form the shape of a smile.
Lifecycle of Spending: In her paper, The Lifecycle of Spending, S. Katherine Roy of J.P. Morgan Asset Management surveyed the spending of 1.5 million U.S. Households who have mortgage, debit, and credit card relationships with Chase Bank and who use those payment types to do a majority of their spending. She concludes that in an environment with 2.5% inflation, actual spending is constant but with an annual spending increase of 0.545% per year. When you select this option along with a 2.5% inflation rate then spending is increased annually by 0.00545. Adjustments are made for other levels of inflation. The Lifecycle of spending option, because it is effectively a lower inflation rate, will result in a higher spending than does TSM.
Age Banding: Somnath Basu's paper Age Banding: A Model for Planning Retirement Needs refines the application of inflation to retirement spending. ORP's version of Age Banding does two things:
Divides spending into 3 categories (Basic Living, Leisure, and Health Care) and assigns each category its own inflation rate. ORP's inflation rates for Leisure and Health care are 2.33 times the Basic Living rate. The Basic Living inflation rate is the spending inflation rate from ORP's input form. The 2.33 value is derived from Basu's paper.
Each category is assign a proportion of the total spending, which, when multiplied times its inflation rate, is used to compute an overall inflation rate for each year. At ages 65, 75, and 85 these proportions are adjusted to reduce Basic Living and Leisure spending while increasing Healthcare spending.
Basu models a fourth category; taxes. For modeling purposes there are two kinds of taxes: personal income taxes and real estate taxes. ORP already models personal income taxes outside of the spending part of the model. ORP includes real estate taxes in Basic Living
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Cyclesafe
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Re: Spending profile in retirement

Post by Cyclesafe »

Ike said something like "Plans are useless, planning is indispensable".

The only value of these heuristics is to plug them - one-by-one - into your spreadsheet. If you are still solvent by age 100, you're probably good to go.
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corn18
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Re: Spending profile in retirement

Post by corn18 »

Cyclesafe wrote: Sun Jul 15, 2018 8:07 am Ike said something like "Plans are useless, planning is indispensable".

The only value of these heuristics is to plug them - one-by-one - into your spreadsheet. If you are still solvent by age 100, you're probably good to go.
I like this. Wish we had a like button.
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TheTimeLord
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Re: Spending profile in retirement

Post by TheTimeLord »

Cyclesafe wrote: Sun Jul 15, 2018 8:07 am Ike said something like "Plans are useless, planning is indispensable".
Excellent. Also remember this quote "Everybody has a plan until they get punched in the mouth ~ Mike Tyson" because life has a pretty good left hook.
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Re: Spending profile in retirement

Post by RadAudit »

Cyclesafe wrote: Sun Jul 15, 2018 8:07 am If you are still solvent by age 100, you're probably good to go.
+1
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Re: Spending profile in retirement

Post by midareff »

What do you use as a spending profile in retirement? I don't don't think the SWR method is what I want to use. My current plan in firecalc and The Flexible Retirement Planner is:

55-60: $105k base spending (current spending), $25k travel
61-70: $95k base spending (kids are off the dole), $25k travel
71-80: $75k base spending, $15k travel
81-death: $75k base spending

Is this reasonable or should I just plan on spending @ SWR until I die? What have those that are retired seen in their lifecycle spending?
Top

I worked until 64 (70 now) and spending was international travel 2X a year. .. maybe $20K. Was probably living on $60K and saving the rest at a high rate.

Retired in April 2012, with a pension, SS and a low WR, about 3% for the first four years despite the raging bull.

In 2016 the ongoing bull had increased the portfolio substantially and I also had some health issues behind me and we really likes cruising so we went after it and raised WR to the mid 4% range. Now in 2018 it's in the 5's to support 4 to 6 upper end cruises a year and the pension and SS can pay all our regular bills. May even go higher for a few years as the go-go phase has a tic-toc clock associated with it, and my risk of return sequence is becoming a greatly diminished factor. My/our time to do the things we want and see the places we want to see is now while we are upright, over top soil (or sea level as the case may be) and ambulatory. I've seen many folks in their upper 70's and early 80's on tour and cruise and it's difficult for the ones still doing it, perhaps even very difficult. Tic-toc, tic-toc.
jpdion
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Re: Spending profile in retirement

Post by jpdion »

Modeling your retirement financial situation is essential to understand the probabilities of "winning" and "losing" the long run prospect of outliving your assets and income. The SWR literature is a useful guide, a starting point. Retirement calculators, if we are honest about inputs, help provide long term perspective. The early years of retirement provide a reality test of the assumptions underlying the plan. Revisiting assumptions and rerunning the calculators periodically is useful for making adjustments going forward. Retirement financial planning and execution is a process which requires vigilance, flexibility, agility and honesty. It also requires a healthy respect for potential of Black Swans, both in the markets and in personal terms, and having a plan and a reserve should something unknown pop up.
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Re: Spending profile in retirement

Post by beanie »

You may think you have good health insurance, but that won’t cover the long term care or continuing care you may need after age 80. That spending is inherently unpredictable, but would certainly blow your over-80 projections out of the water.
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ruralavalon
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Re: Spending profile in retirement

Post by ruralavalon »

corn18 wrote: Sat Jul 14, 2018 7:34 pm What do you use as a spending profile in retirement? I don't don't think the SWR method is what I want to use. My current plan in firecalc and The Flexible Retirement Planner is:

55-60: $105k base spending (current spending), $25k travel
61-70: $95k base spending (kids are off the dole), $25k travel
71-80: $75k base spending, $15k travel
81-death: $75k base spending

Is this reasonable or should I just plan on spending @ SWR until I die? What have those that are retired seen in their lifecycle spending?
"Safe Withdrawal Rate" and the "4% rule" are not withdrawal strategies or spending plans. They are just planning tools, meant to help decide how much of a nest egg you might want to have at your retirement date.

I agree that it's right to expect to spend more in early retirement, when health and energy level allow greater activity like travel and sports.

We are both 72 years of age, I have been retired for 7+ years, and all of our children were through college before I retired. I have no pension or annuity. We are spending less now than in the first years of my retirement, mainly because of less in expenses for air travel.

The Boglehead's wiki has relevant articles, "Spending as retirement progresses" and the "Models of spending as retirement progresses" section of "Introduction to retirement spending models".
Last edited by ruralavalon on Sun Jul 15, 2018 11:52 am, edited 1 time in total.
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rgs92
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Re: Spending profile in retirement

Post by rgs92 »

Spending varies wildly due to things like a string of unexpected house or car repairs or whatever, like a high vet bill. Any given month or year can be much different than usual. That always bothers me when I try to predict expenses. It can really screw up an SWR plan.
The best laid plans...

I'm always amazed at those who say they can easily live on some small amount a month or year. Some years I need like an extra $40,000 that I didn't foresee. And this is not from a huge-income perspective (maybe about $100K net/after taxes in basic expenses with mortgage included).

And I'm note even talking about health care expenses.
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