The Retirement Spending Smile: Why You Need Less Money Than You Think
The Retirement Spending Smile: Why You Need Less Money Than You Think
EXECUTIVE SUMMARY
- The Myth: Financial planners assume your spending grows by inflation (e.g., 3%) every single year until you die. This creates a terrifyingly large “Number” needed to retire.
- The Reality: Research by David Blanchett (Morningstar) shows that real spending actually declines by ~1% per year between ages 65 and 80. You stop traveling, buy fewer clothes, and eat out less.
- The Smile: Spending follows a “Smile” shape: High at 65 (Travel), Low at 75 (Homebody), High at 85 (Nursing Care). Recognizing this allows you to retire earlier with less capital.
You won’t be climbing Machu Picchu at age 82. The “Constant Inflation Assumption” is the most expensive mistake in retirement planning. It forces you to work years longer than necessary to fund a lifestyle you won’t physically be able to enjoy. Team BMT Analysis incorporates the “Spending Smile” to right-size your nest egg. By front-loading enjoyment and back-loading insurance (like QLACs), you can optimize utility. Source: Journal of Financial Planning (David Blanchett)
Scenario: Retiree with $50k annual discretionary budget (excluding bills).
- Phase 1 (65-75): The “Go-Go” Years.
Spending: $50k/year + Inflation.
Activity: Global travel, new cars, hobbies. - Phase 2 (75-85): The “Slow-Go” Years.
Spending: Drops to ~$35k/year (Real decline).
Activity: Local trips, reading, gardening. You physically slow down. - Phase 3 (85+): The “No-Go” Years.
Spending: Spikes back to $60k+ (Medical/Care).
Hedge: This phase is funded by QLAC (#413) or Long-Term Care Insurance, not just portfolio withdrawals.
Portfolio Survival Impact
| Assumption Model | Required Nest Egg (for $50k income) |
|---|---|
| Constant Inflation (Standard) | 1250000 |
| Spending Smile (Realistic) | 1050000 |
*Chart Note: Applying the Smile Curve reduces the required capital by ~15-20%. This implies you might be able to retire 3-4 years earlier than the standard calculator says.
CRITICAL SCENARIO: The “Inflation Hedge” Effect
Why slowing down fights inflation.
| Inflation Rate | Standard Retiree | “Slow-Go” Retiree |
|---|---|---|
| 3% Annual Inflation | Must withdraw 3% more cash every year. | Withdraws flat nominal amount. (Decreasing real spending). |
| Portfolio Strain | High (Compounding withdrawals). | Low (Natural consumption hedge). |
Execution Protocol
Don’t just have one “Retirement Number.” Calculate: 1) Active Budget (Ages 60-75). 2) Passive Budget (Ages 75+). Your Passive Budget is likely 20-30% lower in real terms.
Use VPW Strategy (#418) to authorize higher withdrawals in the early years. Don’t hoard money for your 80s that you won’t have the energy to spend.
The “Smile” implies high costs at the very end (Nursing). Do not self-insure this completely. Use a Deferred Annuity (QLAC) or dedicate your Home Equity (Reverse Mortgage potential) as the “Break Glass in Case of Emergency” fund for age 85+.
Fail Condition: Ignoring the late-life medical spike. The Smile isn’t a steady decline; it’s a U-shape. You must prepare for the upward hook at the end.
WEALTH STRATEGY DIRECTIVE
- Do This: Re-run your retirement simulation using a “real spending decline” of 1% per year. You will likely find your probability of success jumps significantly.
- Avoid This: The “Fear of Running Out” leading to miserly living. The saddest outcome is dying with millions in the bank because you budgeted for a lifestyle you never lived.
Frequently Asked Questions
Does healthcare ruin the smile?
Healthcare costs do rise faster than inflation, but for most healthy retirees, they don’t overtake the savings from stopped travel/dining until age 82-85. The dip in the middle (70s) is real.
Is this risky?
It’s less risky than working until you die. It aligns your money with your biology. The risk is over-saving time (life) for money you won’t use.
Does inflation affect seniors differently?
Yes. Seniors spend less on tech/apparel (deflationary) and more on services/medical (inflationary). However, total basket consumption usually drops.