Explanations for the Decline in Spending at Older Ages

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Beliavsky
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Explanations for the Decline in Spending at Older Ages

Post by Beliavsky »

If people plan on decreasing spending by 2% a year in real terms, rather than spending the same amount, they can spend more in early retirement on travel and entertainment while they are still healthy enough to enjoy it. The many studies of a sustainable spending rate may be too conservative in assuming fixed real spending.

A related BH wiki page is Surveys of retirement spending.

Explanations for the Decline in Spending at Older Ages
by Susann Rohwedder, Michael D. Hurd & Péter Hudomiet
NBER Working Paper
September 2022
Abtract:
We use new data from the 2019 wave of the Consumption and Activities Mail Survey to help interpret the observed decline in spending as individuals age. At one extreme, forward-looking individuals optimally chose the decline; at the other, myopic individuals overspent and were forced to reduce spending because they had run out of wealth. Which interpretation is correct has important implications for the measurement of economic preparation for retirement. According to their own assessments, the fraction of respondents feeling financially constrained is lower at advanced ages, and the fraction satisfied with their economic situation is considerably higher at older ages than at ages near retirement. An important mechanism reconciling the evidence of reduced spending and greater economic satisfaction at older ages may be that individuals’ enjoyment of several activities declines with worsening health, widowing, and increasing age, leading to a lessening desire to spend on them. We find strong support for this hypothesis. Nonetheless, close to 20% of those older than 80 report not being satisfied with their financial situation, pointing to heterogeneity in economic security.
We first update prior results about longitudinal spending trajectories using CAMS waves from 2005 to 2019. Table A4 shows the underlying data displayed as the median of household changes in real spending. Thus, the median change between 2005 and 2007 among 65- to 69-year-old singles was -5.43% or 2.72% per year Over the 14-year time period, the median two-year decline was 3.73% among single persons and 5.56% among couples for annual rates of decline of 1.88 and 2.78 respectively Notably, with the exception of several entries for single persons 85 or older, every entry is negative, showing that reductions in spending were almost universal over this time period.
...
We observe a steady increase with age in the attribution of reduced spending to having less enjoyment, reaching 8% of the population at 85 and older. Some 8% of those 75 to 79 attribute increased spending to getting more enjoyment from such spending, but that percentage declines sharply at greater ages. The overall impression is of substantial heterogeneity, but with a tendency toward fewer getting enjoyment from the queried types of spending at older ages.
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snackdog
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Re: Explanations for the Decline in Spending at Older Ages

Post by snackdog »

The decline can have a dramatic rise if health issues require assisted living or nursing home care.
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Re: Explanations for the Decline in Spending at Older Ages

Post by jebmke »

snackdog wrote: Mon Sep 19, 2022 11:20 am The decline can have a dramatic rise if health issues require assisted living or nursing home care.
Also can jump like a jackrabbit when RMDs start and your tax bill shoots up. There are some ways to mitigate this of course.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: Explanations for the Decline in Spending at Older Ages

Post by HomeStretch »

Based on my parents’ situation, I see spending post-age 60 as more of a “smile” curve:
- active in their 60s and early 70s splitting their time between two homes
- spending declined in their mid to late-70s.
- spending started to ramp up at age 80 due to needing assistance around their condo for things they could no longer do (even with family helping out).
- spending ramped up even more as they needed more help (part time aide, Uber costs due to slowing down driving, meal delivery, etc).
- finally, spending ramped up to an unsustainable level when on spouse moved to institutional care for severe dementia/other issues which depleted their modest portfolio culminating in a Title XIX filing for long-term care benefits

This “smile” spending curve is common across most of my friends’ parents. Not all end up with one spouse institutionalized but a few have with more ending up in higher-cost assisted living. Other friends have retired earlier than planned to take care of aging parents.

Real eye-opener about the quality and cost of elder assistance with household, care, etc.
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Beliavsky
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Re: Explanations for the Decline in Spending at Older Ages

Post by Beliavsky »

Thanks for the replies. Long term care insurance costs money but permits a retiree to comfortably spend a larger fraction of his or her savings that remain after accounting for the expense of future premiums. Accounting for this, I wonder for which people LTCI makes sense. The fraction of people with LTCI is small.
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Re: Explanations for the Decline in Spending at Older Ages

Post by carolinaman »

I am 12 years in retirement and can attest to decline in certain spending: i.e. travel, sporting events, golf, etc. Fortunately, we have not yet experienced a major uptick in health care costs but they may happen in the future.

I am age 78 and wife is 79. My health is still pretty good but my wife is much more limited in activities which explains some of our decline in spending.

I think we are experiencing the general trend but it is hard to predict this for everybody. I know people in the 80s still traveling and very active. The big wild care is assisted living or SNF. If and when that hits, it is a major, major expense. Some of health issues can cause skyrocketing costs as well for expensive cancer drugs, etc.
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Re: Explanations for the Decline in Spending at Older Ages

Post by TN_Boy »

Beliavsky wrote: Mon Sep 19, 2022 12:11 pm Thanks for the replies. Long term care insurance costs money but permits a retiree to comfortably spend a larger fraction of his or her savings that remain after accounting for the expense of future premiums. Accounting for this, I wonder for which people LTCI makes sense. The fraction of people with LTCI is small.
Well if you search we've had numerous threads on LTC insurance, so if you are looking for why people do (or don't) buy such insurance, plenty to peruse there. I'll leave it at that, since I don't think it useful to fill this thread up with another discussion on the topic; it's all been covered!

I'll remark on the general spending pattern, I think most people do spend more early, because they can do more, then reduce spending later because they have the "things" they need and don't have the ability or energy to travel as much, etc. And of course medical issues may then increase spending the last few years.

But whether early or late spending, the throttle many people have is the simple problem that future spending needs (for LTC care, children that might need help, etc etc) are difficult to estimate, market returns cannot accurately be estimated, and of course one cannot easily generate more income once long retired. This is why, I believe, some people are more conservative than the numbers say they have to be for early retirement spending.

I suspect but have no evidence :-) that some retirees get older, have their needs met and increase their resolve to leave a larger legacy, another reason to moderate spending.
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Beliavsky
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Re: Explanations for the Decline in Spending at Older Ages

Post by Beliavsky »

An objection to fixed immediate annuities is that the payments decline in real terms over time. If one believes that the current 8% inflation will soon revert to the 2-3% range, the payments of an immediate annuity would match the spending patterns found in the study.
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Re: Explanations for the Decline in Spending at Older Ages

Post by JPM »

When young (<65), most people spend money on their children, their mates, and sometimes their parents or even friends. In most cases they are happy to do so. When past 70, if there is something you really want and can afford, you probably already have it. If there is somewhere you want to travel to, you have probably already been there. Unless your health and vitality are particularly good, by your mid 70s air travel and long road trips are a lot of work and many prefer cruising if they travel at all.

The other thing that happens past 70 is that the people you love and on whom you enjoyed spending money are often not around (parents and maybe mate) or don't want your money as they prefer to spread their own wings having flown from your nest. Sometimes one or more of your kids is already richer than you by the time you are 70, even more likely when you pass 80. Some cases your mate is alive but his/her health does not permit the continuation of the activities you enjoyed together. Money keeps coming in, but you have no constructive use for it. From my observation, it's not usual that someone is trying to pile up a big legacy, it just happens if you are prosperous and can't bring yourself to give it away while you are living.

Some people do enjoy piling up money as a way of keeping score in the game they are playing if still playing late in life. Buffett and Munger come to mind as they are still in their game. They do not seem to be engaging in conspicuous vanity projects like financing space shots or buying newspapers to broadcast their views. They are busy playing their game of business improvement.

An older widowed friend remarked to me recently along these lines; " I have a lot of money now. I can have anything I want to have, I can go anywhere I want to go, and I can live anywhere I want to live, but I'm not happy. When I was a young man, I married a widow with four children. When we were raising our kids, a lot of times I worked two jobs and she worked too and still we seldom had two spare nickels to rub together. But I was happy then when we were working together to make a life for our family."
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Sandtrap
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Re: Explanations for the Decline in Spending at Older Ages

Post by Sandtrap »

snackdog wrote: Mon Sep 19, 2022 11:20 am The decline can have a dramatic rise if health issues require assisted living or nursing home care.
+1
Good point.

Health issues, medical costs (annual and persistent), as well as insurance changes, etc, and costs for lifestyle physical accomodations. . . all add up, year after year after year.

Metaphor

After a certain age, we age in "cat years". .
After a certain age, we age in "dog years". .
That exponential glide slope continues. . faster than a 10% withdrawal rate on a slim portfolio.
Finally, at certain age, we age in "cricket years". . or "hummingbird years". . .

So, granted there might be a decline in spending for some or many, and only at certain life stages, but for some or many it only lasts for some time until the "dog years, cat years, hummingbird years" accelerate aging and health.

j :D
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Beliavsky
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Re: Explanations for the Decline in Spending at Older Ages

Post by Beliavsky »

The sustainable spending rate of a portfolio can be simulated given assumptions for the mean and volatility of normally distributed annual real returns, which equal nominal returns minus inflation. If someone assumes that annual real returns of a portfolio of stocks and bonds have a mean of 4% and standard deviation of 10% (for example), and they simulate 30-year portfolio survival rates based on various initial spending rates (say 3%, 4%, 5%) assuming constant real spending, I believe the survival rates are the same as for a simulation that assumes a mean of 4%+2% = 6% for annual real returns with a 2% decline in annual real spending. In general an X% assumed decline in annual real spending lets you plan your initial spending rate as if the returns of your portfolio will be X% higher.
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Re: Explanations for the Decline in Spending at Older Ages

Post by TN_Boy »

Beliavsky wrote: Tue Sep 20, 2022 10:26 am The sustainable spending rate of a portfolio can be simulated given assumptions for the mean and volatility of normally distributed annual real returns, which equal nominal returns minus inflation. If someone assumes that annual real returns of a portfolio of stocks and bonds have a mean of 4% and standard deviation of 10% (for example), and they simulate 30-year portfolio survival rates based on various initial spending rates (say 3%, 4%, 5%) assuming constant real spending, I believe the survival rates are the same as for a simulation that assumes a mean of 4%+2% = 6% for annual real returns with a 2% decline in annual real spending. In general an X% assumed decline in annual real spending lets you plan your initial spending rate as if the returns of your portfolio will be X% higher.
I'm trying to parse that last sentence. So, for example, I take 6% from the portfolio the first year, the next year I adjust the 6% by inflation, take THAT value and ... reduce by 2% ..? I need slightly more of an example. Does this work well with a bad sequence of returns?

Does this also work with historical scenarios? Withdrawal studies use either monte carlo simulations or historical returns.

As I noted previously, the thing that tends to make retirees pause about higher initial spending is that while I might plan on lowering spending later, circumstances might force other things to happen.
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Re: Explanations for the Decline in Spending at Older Ages

Post by Beliavsky »

TN_Boy wrote: Tue Sep 20, 2022 11:55 am
Beliavsky wrote: Tue Sep 20, 2022 10:26 am The sustainable spending rate of a portfolio can be simulated given assumptions for the mean and volatility of normally distributed annual real returns, which equal nominal returns minus inflation. If someone assumes that annual real returns of a portfolio of stocks and bonds have a mean of 4% and standard deviation of 10% (for example), and they simulate 30-year portfolio survival rates based on various initial spending rates (say 3%, 4%, 5%) assuming constant real spending, I believe the survival rates are the same as for a simulation that assumes a mean of 4%+2% = 6% for annual real returns with a 2% decline in annual real spending. In general an X% assumed decline in annual real spending lets you plan your initial spending rate as if the returns of your portfolio will be X% higher.
I'm trying to parse that last sentence. So, for example, I take 6% from the portfolio the first year, the next year I adjust the 6% by inflation, take THAT value and ... reduce by 2% ..? I need slightly more of an example. Does this work well with a bad sequence of returns?

Does this also work with historical scenarios? Withdrawal studies use either monte carlo simulations or historical returns.
Yes, that is what I mean by "2% decline in annual real spending", and it applies to either historical simulations or Monte Carlo simulations. So if you spend $100K the 1st year, during which inflation is 8%, you spend $106K the 2nd year. To be more precise, $100K * 1.08 * 0.98 = $105,840. The sequence-of-return risk that you mention is still present.
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Re: Explanations for the Decline in Spending at Older Ages

Post by TN_Boy »

Beliavsky wrote: Tue Sep 20, 2022 12:24 pm
TN_Boy wrote: Tue Sep 20, 2022 11:55 am
Beliavsky wrote: Tue Sep 20, 2022 10:26 am The sustainable spending rate of a portfolio can be simulated given assumptions for the mean and volatility of normally distributed annual real returns, which equal nominal returns minus inflation. If someone assumes that annual real returns of a portfolio of stocks and bonds have a mean of 4% and standard deviation of 10% (for example), and they simulate 30-year portfolio survival rates based on various initial spending rates (say 3%, 4%, 5%) assuming constant real spending, I believe the survival rates are the same as for a simulation that assumes a mean of 4%+2% = 6% for annual real returns with a 2% decline in annual real spending. In general an X% assumed decline in annual real spending lets you plan your initial spending rate as if the returns of your portfolio will be X% higher.
I'm trying to parse that last sentence. So, for example, I take 6% from the portfolio the first year, the next year I adjust the 6% by inflation, take THAT value and ... reduce by 2% ..? I need slightly more of an example. Does this work well with a bad sequence of returns?

Does this also work with historical scenarios? Withdrawal studies use either monte carlo simulations or historical returns.
Yes, that is what I mean by "2% decline in annual real spending", and it applies to either historical simulations or Monte Carlo simulations. So if you spend $100K the 1st year, during which inflation is 8%, you spend $106K the 2nd year. To be more precise, $100K * 1.08 * 0.98 = $105,840. The sequence-of-return risk that you mention is still present.
Is the SOR risk the same or higher with this approach? It's not clear to me that the reduction in spending later would necessarily offset taking out more early if you had a really bad sequence.
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Re: Explanations for the Decline in Spending at Older Ages

Post by vineviz »

TN_Boy wrote: Tue Sep 20, 2022 11:55 am I'm trying to parse that last sentence. So, for example, I take 6% from the portfolio the first year, the next year I adjust the 6% by inflation, take THAT value and ... reduce by 2% ..? I need slightly more of an example. Does this work well with a bad sequence of returns?
Yes.

Mathematically, a expected decrease in spending of X%/year is equivalent to increase in expected real returns of X%/year. They have the same impact on portfolio survivability.

Just remember that if the expected real return goes up by X% that doesn't mean that the SWR goes up by X%.
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Beliavsky
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Re: Explanations for the Decline in Spending at Older Ages

Post by Beliavsky »

TN_Boy wrote: Tue Sep 20, 2022 12:28 pm Is the SOR risk the same or higher with this approach? It's not clear to me that the reduction in spending later would necessarily offset taking out more early if you had a really bad sequence.
It's higher, because if the stock market tanks at the beginning of your retirement and eventually recovers, you benefit less from that recovery if you have been spending at a higher rate and have less invested.
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Re: Explanations for the Decline in Spending at Older Ages

Post by TN_Boy »

Beliavsky wrote: Tue Sep 20, 2022 12:36 pm
TN_Boy wrote: Tue Sep 20, 2022 12:28 pm Is the SOR risk the same or higher with this approach? It's not clear to me that the reduction in spending later would necessarily offset taking out more early if you had a really bad sequence.
It's higher, because if the stock market tanks at the beginning of your retirement and eventually recovers, you benefit less from that recovery if you have been spending at a higher rate and have less invested.
That would be my intuition, since in the example, you are pulling 6% or so of the original portfolio value for the first few years. Which adds right up if the market is also crashing.

But I hadn't run simulations on it. I don't think I'd like a method that increases the SOR risk.
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Re: Explanations for the Decline in Spending at Older Ages

Post by ProsperGoalzz »

JPM wrote: Mon Sep 19, 2022 2:17 pm
An older widowed friend remarked to me recently along these lines; " I have a lot of money now. I can have anything I want to have, I can go anywhere I want to go, and I can live anywhere I want to live, but I'm not happy. When I was a young man, I married a widow with four children. When we were raising our kids, a lot of times I worked two jobs and she worked too and still we seldom had two spare nickels to rub together. But I was happy then when we were working together to make a life for our family."
This makes me feel sad and is a reminder that life is short and we should enjoy our loved ones while we have them. Reinforces my plan to retire at 56.

I hope your friend can find his happiness again.
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