It’s worth figuring out which profile matches your spending, said Wade Pfau, a professor at the American College of Financial Services and director of retirement research at McLean Asset Management. If you fall into one of the first three groups, you may be looking at spending increases throughout your retirement. But people in the biggest group — the 39 percent who spend more than others on food and drink — can reasonably expect the “Go-Go, Slow-Go, No-Go” progression.
“This is the group that tends to spend less as they age,” Dr. Pfau said.
Even when it declines, retirement spending in today’s dollars doesn’t always follow a straight path. It often resembles a smile, according to a study by David Blanchett, head of retirement research at Morningstar. That is, it starts high, gradually declines, and then increases toward the end of a retiree’s life. He based his study on real-life data from the Health and Retirement Study, a project of the National Institute on Aging and the University of Michigan.
Those later-year gains in spending are almost always related to health care, Dr. Blanchett said. Even with those increases, however, retirees in their 70s and 80s still tend to spend less than when they first quit working.
“The real change in annual spending through retirement is clearly negative,” Dr. Blanchett said.
This is something financial advisers should go over with their clients, he added. “They can say, ‘The most common assumption is that you’re going to increase your spending by inflation, but here’s the deal: The average person doesn’t do that,’” he said.
Dr. Blanchett suggests running a separate retirement-spending projection that assumes your spending grows by 1 percentage point less than inflation.
“How does that change how you can spend your money?” he said. “One thing it can do is free up money when you can most enjoy it. Take that cruise when you’re 65 or 70 because you’re probably not going to be able to take it when you’re 80.”
Not every financial adviser thinks it’s a great idea to count on lower spending in your later years. Michaela Herlihy, president of Beacon Financial Planning of Cape Cod in Hyannis, Mass., will happily create alternate spending projections for clients who request them, but her recommendation is to stick with the 4 percent rule.