The Retirement Spending Smile: Why You Might Be Over-Saving for Old Age
The Retirement Spending Smile: Why You Might Be Over-Saving for Old Age
COACHING POINTS
- The Myth: Most retirement calculators assume your spending will increase by inflation every single year (e.g., $50k, $51k, $52k…) until you die. This creates an artificially high savings target.
- The Reality: Research by Dr. David Blanchett shows that retiree spending follows a “Smile Curve.” It is high in the early years (Travel), drops significantly in the middle years (Slow-Go), and rises slightly at the end (Healthcare).
- The Impact: Because spending typically decreases in real terms as you age, the actual nest egg required to sustain a lifestyle is often 15-20% lower than standard models predict.
Standard financial planning assumes you will spend as much money at age 85 as you do at age 65 (adjusted for inflation). In reality, an 85-year-old rarely books round-the-world flights or buys new cars. They enter the “Slow-Go” phase. Recognizing this biological reality allows you to retire sooner or spend more freely in your vibrant early retirement years. Source: Journal of Financial Planning / David Blanchett (Morningstar)
Scenario: You retire with a $100,000/year budget. Inflation is 3%.
- Standard Model (Constant Real):
Age 65: $100k.
Age 75: $100k (inflation-adjusted equivalent).
Age 85: $100k.
Total Wealth Needed: High. - Smile Curve Model (Reality):
Age 65 (Go-Go): $100k. (Travel, hobbies).
Age 75 (Slow-Go): $80k. (Less activity, downsizing).
Age 85 (No-Go): $90k. (Healthcare costs rise).
Total Wealth Needed: Lower (The dip in the middle saves the portfolio).
What-If Scenario: The “Permission to Spend”
Comparison: Safe Withdrawal Rate (SWR) adjustments based on spending flexibility.
| Assumption | Safe Withdrawal Rate | Annual Income ($1M Portfolio) |
|---|---|---|
| Constant Spending (Rigid) | 4.0% | $40,000 |
| Smile Curve (Flexible) | 4.5% – 5.0% | $45,000 – $50,000 |
The Lifecycle of Spending
| Retirement Phase | Real Spending Level (%) |
|---|---|
| Phase 1: Go-Go (65-75) | 100 |
| Phase 2: Slow-Go (75-85) | 80 |
| Phase 3: No-Go (85+) | 90 |
*The “Smile” shape comes from the dip in the middle (Slow-Go years) where energy declines but health is still stable, leading to natural frugality.
Required Savings Reduction
| Model | Nest Egg Needed ($ Millions) |
|---|---|
| Linear Inflation Model | 2.0 |
| Blanchett Smile Model | 1.7 |
*For many households, the Smile Curve reveals they are already “oversaved” by hundreds of thousands of dollars.
Execution Protocol
Don’t create one budget for “Retirement.” Create three:
1. Go-Go (Age 60-75): High travel, dining, activity.
2. Slow-Go (Age 75-85): Home-centered, lower discretionary.
3. No-Go (Age 85+): High medical/care, very low discretionary.
The “right side of the smile” (late-life spending spike) is the dangerous part. It is driven by healthcare. To safely spend down your assets in the Slow-Go years, you must insure against the catastrophe of nursing home costs in the No-Go years (#262).
Use the math to overcome “saver’s guilt.” If your plan works with linear spending, you are likely dying with too much money. Shift that surplus capital to the early years where your health allows you to enjoy it.
COACHING DIRECTIVE
- Do This: Adjust your inflation assumption. Instead of applying 3% inflation to all expenses, apply it only to non-discretionary items (food, tax, utilities). For travel and fun, assume a 0% real increase or even a decline.
- Avoid This: Being “house rich and cash poor” at 85. The Smile Curve assumes you stay in your home, but downsizing in the “Slow-Go” phase can release even more equity to fund the “No-Go” healthcare costs.
Frequently Asked Questions
Does this apply to everyone?
No. Wealthy retirees (who have money to burn) often keep spending high because they simply switch from “active travel” to “expensive comfort/service.” The Smile Curve is most pronounced for middle-to-upper-middle class retirees.
What about medical inflation?
Medical costs historically rise faster than general inflation. This is why the curve turns up at the end. However, Medicare and supplements cover a baseline; the risk is purely Long-Term Care (custodial).
Is this risky?
Relying on spending declines is a risk if a medical breakthrough suddenly keeps you active until 100. Always keep a buffer. The Smile Curve is a tool for optimization, not a guarantee.