Planning on Future Decreases in Discretionary Spending? OK With Us.

In this post we will revisit the planning implications of research that finds that household spending may decrease in real dollars as retired households age. This week we became aware of research in the U.K. that, like several other research reports we have discussed, shows that spending in retirement does decrease in real dollars, on average. Unlike other research, however, this research measured the sources of spending decreases in retirement and concluded:

• Much of the decline in consumption is explained by falls in spending on “non-essential items” such as recreation, eating out and holidays.
• Spending on essential items remains relatively flat during retirement, which means essential items account for an increasing proportion of the overall household budget. Indeed, by age 80+, over 50% of expenditure is on essential goods and services.
• There does not appear to be a post-retirement spending boom on leisure and holidays. In fact, from age 50 onwards, spending on most non-essential items begins a slow decline.

We believe the conclusions of this research are consistent with the thoughts we expressed on the planning implications of possible spending decreases in retirement in our post of December 11, 2021 where we said,

Reflecting Non-Financial Assets in Your Asset Allocation Strategy

Unless you are almost totally reliant on Social Security and/or your pension benefits, one of the most important decisions you will need to make in (or near) retirement is how to allocate your Accumulated Savings among risky investments, such as equities, and less-risky investments, such as bonds or annuities.  

Stress-Testing Your Retirement Plan for Rising Interest Rates/Inflation, Part II

One of the three basic principles of the Actuarial Approach to personal financial planning is periodically stress-testing of significant assumptions made in your plan to assess the risks that these assumptions may not be realized in the future and to determine if you want, or need, to take actions that may mitigate these risks. In this post, which is a follow-up to our post of March 16, 2021, we once again look at the importance of future inflation and resulting future expected increases in expenses in retirement.

Not Spending Enough in Retirement? Plan to Spend More

Many researchers have concluded that retirees frequently underspend their available assets in retirement. And while we are not pushing you to spend more than you want, we don’t want you to underspend if that is not part of your plan. In our post of June 19, 2021, we discussed how failure to spend assets during retirement (underliving wealth) can prevent you from achieving your financial goals. In our post of June 23, 2021, we noted that “the many uncertainties involved in retirement planning can and do lead to anxiety, stress and sub-optimal decisions,” and we suggested facing financial fears in retirement by developing a robust plan to mitigate and/or address future contingencies.

Hey Retirees; What Percentage of Your Retirement Assets Should be Invested in Stocks?

In his recent Advisor Perspectives article entitled, “Is It Still Worth Investing in Stocks?” Fellow actuary Joe Tomlinson outlines the potential positives and negatives for retired households of investing in stocks in today’s low-interest rate, high-stock valuation environment. He concludes that there are tradeoffs associated with taking stock market risk, and different households will “put different weights on the positives and negatives.” We suggest you read Mr. Tomlinson’s excellent article.

What Will Retirees (and their Financial Advisors) Do Now That The 4% Rule is Dead?

We have never been big fans of the 4% Rule. One of the major reasons we started this blog in 2009 was because we didn’t particularly care for the 4% Rule, and we thought we could help people make better financial decisions by suggesting a more dynamic (flexible) spending strategy based on fundamental actuarial principles. In 2014 alone, we posted four separate posts trying to convince our readers to ditch the static 4% Rule and adopt the dynamic Actuarial Approach that we recommend.

It’s Time to Perform Your January 1, 2022 Actuarial Valuation

Congratulations. You made it through 2021!

In our ongoing effort to turn you all into actuaries, this post will recommend that you perform an “actuarial valuation” based on your personal and financial data as of January 1, 2022. An annual actuarial valuation is part of our 7-step Recommended Financial Planning Process. As part of this process, we will also encourage you to prepare a brief “actuarial report” to document your thought-process and any planning decisions you make for this year.

Are Guaranteed Lifetime Income Products Part of Your Investment Strategy in Retirement?

As discussed in our post of November 27, 2021, balancing the sometimes-conflicting requirements to grow, protect and carefully spend household assets is an important element of a financially successful retirement plan.

How Much Did You Spend in 2021?

The first three steps in our Recommended Financial Planning Process involve estimating your annual recurring and non-recurring expenses in retirement and categorizing those estimated expenses as either “Essential” or “Discretionary.” In this post, we suggest that you begin this process for 2022 planning purposes by gathering your actual spending data for 2021. In a future post, we will encourage you (as we do every year around this time) to perform an actuarial valuation of your assets and spending liabilities using your estimated future recurring and non-recurring annual spending. 

How Will Your Spending Change During Your Retirement?

This post is a follow-up to our post of March 19, 2021, “What is Your Plan for Future Spending in Retirement?” Impetus for this post was the recent release of a retirement spending pattern research paper by Anqi Chen and Alicia Munnell from the Center for Retirement Research at Boston College entitled, “Do Retirees Want Constant, Increasing or Decreasing Consumption?”

We briefly discuss the results of Mses. Chen and Munnell’s research and possible implications for your financial planning in or near retirement.