The Smokies and Retirement Spending

Sunrise atop Mt. Sterling fire tower - Great Smoky Mountain NP

“Retirement can be a great joy if you can figure out how to spend time without spending money.”
Unknown

I had the pleasure of being “labor-less” this past Labor Day weekend. I took my 15 year old twin boys and their friend, Ben, to Great Smoky Mountain National Park for a 3 day backpacking trip to climb Mt. Sterling. The weather was perfect and we had more fun than we deserved.

One has much time to ponder when he is in the woods. My pondering led me to retirement spending (aren’t you jealous?). For me, a retirement of hiking beautiful places would be most enjoyable and inexpensive. But for many, this would not be as enjoyable. I know this might come as a shock, but many people an affinity for bed and breakfasts and finer hotels over sleeping in the woods. These different views of an enjoyable retirement highlight how different retirement spending can be for two people or one couple over another. I thought we should delve into this topic of retirement spending.

Start of 3 day backpacking trip on Little Cataloochee Trail - Mitchell & Max Whalen and Ben Espy

How much are you going to spend in retirement? What once seemed like a simple question has become incredibly complicated in recent years.

Why? First of all, a diminishing number of people actually plan to leave work and embrace leisure on a full-time basis, and those who do seem to be doing it are choosing to do it later than people from earlier generations. Though not representative of our client base, of the oldest baby boomers, who are now age 68, only 52% are actually retired. 21% are still working full-time. According to a Gallup survey, 37% of Americans say they plan to work full-time past the age of 65, but that may be underestimating the actual shift in preference. Some of our clients are preferring to work to some degree past their “retirement” date.

When people DO leave the workplace, it now appears that some of the assumptions about their spending habits will have to be revisited. The default assumption for many retirement plans is that what you spend now for things like food, clothing etc. will remain pretty much the same the day after retirement as they were the day before. Most of our clients’ mortgages are paid off (or almost) by retirement. Expenses related to commuting to and from work will diminish. When you sort it all out, you end up with a baseline spending plan, which includes a new car every several years, dining out occasionally, making home improvements and other basic necessities. These expenses have traditionally been assumed to increase each year roughly with the inflation rate.

On top of that, it was assumed that in the vigorous early years of retirement, people would spend more on travel and other activities than they did when they were working, so their overall expenses would go up the day after they retire and gradually diminish as they found it harder and harder to travel or play 18 holes of golf every day. At some point in the age curve, health expenses would start to rise. The people who study retirement expenditures talked about a "smile" graph of expenses, where it cost more to live and play in the earlier and later years of retirement than in the middle years.

What's wrong with that? For one thing, when you look at the Bureau of Labor Statistics data on what people actually spend in their later years, it contradicts this comfortable smile pattern. People between the ages of 65 and 74 tended, on average, to increase their annual spending levels between 1.11 percentage points and 1.78 percentage points more per year more than the inflation rate. Over that decade of their lives, any assumption that used the inflation rate would undercount their aggregate spending by somewhere between 11% and 19%. The combined 69 years of experience that Warren and I have accumulated suggest that after age 75 spending actually declines. We have rare increase in healthcare costs, but those are much less frequent than the nation as a whole averages.

To make things more complicated, the statistics suggest that retirees tend to cut back on their spending whenever the investment markets go down. In 2009, people age 75 and older, on average, spent less than they did the year before, and they actually spent less than that in 2010. That same year, the average spending of people age 65-75 declined a remarkable 3.55%. As your wealth goes down, so too does your spending. This is the corrective action that our Marathon Roadmap Process helps us determine.

How can we predict these things in advance? We can't. And it's important to remember that these broad statistics don't apply to your individual circumstances; they just suggest things that most of us should watch out for. The only clear conclusion of the research, thus far, is that we need to be as exacting as possible in our assumptions about spending, and hope we're pleasantly surprised as the years go on.

It’s not too different from the hiking trail. We prepare as best we can for changes in the weather and make course corrections as needed. Fortunately, this past weekend was as perfect as I can remember.

Thank you for the trust and confidence you have placed in us and giving us the opportunity to provide education to you on your way to building your wealth.

As always, thank you for the introduction of your friends and family that so many of you have made. We are honored to serve you! As a service to our clients, we are happy to act as a sounding board for your friends and family. If any of them should need a second opinion on their financial situation, introduce them to www.striblingwhalen.com or call us at 678-989-0048.

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Regards,

Warren D. Stribling, IV, CFP^®
Principal
warren.stribling@striblingwhalen.com

Brian E. Whalen, CFP^®, CIMA^®
Principal
brian.whalen@striblingwhalen.com

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Brian Whalen and Warren Stribling and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Raymond James Financial Services, Inc. does not provide advice on legal issues. These matters should be discussed with the appropriate professional.

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