Spending does not stay flat across a retirement

Comparisons of how spending changes in retirement usually pick a winner. This one picks the circumstances, which is more useful.

The flat assumption

Most withdrawal planning assumes a constant real amount drawn every year for a fixed number of years. That assumption is convenient for the arithmetic and is not how most households actually spend their money.

Spending in the early years frequently runs higher, at the point where health and enthusiasm are both at their peak. It often declines through the middle years as travel and activity reduce, sometimes by a substantial margin. Late-life costs can rise again, particularly where care becomes necessary, and that is the hardest part to plan for.

The evidence and its limits

Studies of retiree spending in several countries have generally found a decline in real terms through the middle of retirement. The size and shape of that decline vary considerably by country, by income level and by which data source is used. Some of the observed decline reflects constraint rather than preference, because households with less money necessarily spend less.

The useful part is this: separating choice from necessity in that data is genuinely difficult, and honest summaries acknowledge as much. Treating the pattern as a general tendency rather than a rule to plan around precisely is the safer reading of it.

What it means for a withdrawal plan

A plan assuming flat real spending across thirty years may be building in considerably more caution than the household needs. That extra caution has a cost, which is spending less in the years when the money would have been most enjoyed.

For most people, it also has a benefit, which is a buffer against late-life costs that are genuinely unpredictable in size and timing. Neither the caution nor the flexibility is free, and choosing between them is a personal judgement rather than an optimisation. Where a plan is finely balanced, that is exactly the point at which regulated advice earns what it costs.

Lumpy costs

Cars, roofs, boilers and substantial help for family arrive as lumps rather than as an even annual amount. A plan built on smooth withdrawals meets these by either selling more in a bad year or holding cash against them. Listing the foreseeable lumps and their approximate timing turns them from shocks into scheduled items on a plan.

A separate cash reserve for known lumps works considerably better than treating each one as an unplanned withdrawal.

The unforeseeable lumps are what the general buffer exists for, and they are the reason it should be held separately.

Inflation does not apply evenly

A retiree's spending basket differs from the national average, typically weighted more towards essentials and towards services. Where those categories rise faster than the general index, personal inflation runs ahead of the published figure. The effect is documented in several countries, and its size varies with the composition of the individual basket.

For most people, uprating withdrawals by a general index may therefore understate what is needed to maintain the same standard of living. None of this is precise enough to plan around exactly, and it argues for margin rather than for a specific adjustment.

Some of this will suit you and some will not, and that is the point.

Reviewing against reality

Recording actual spending for a year or two before stopping work produces a far better starting figure than any estimate. Comparing planned withdrawals against actual spending each year shows the drift early, while correcting it is still cheap.

Households frequently find they are spending less than planned, which is information about capacity rather than a failure. The review is also where a large cost coming up can be brought into the plan rather than met in a hurry. This is one of the few areas where the arithmetic improves considerably with a small amount of record keeping.

Side by side

The takeaway

Plan the shape of the spending, not just the total. The shape is where the flexibility actually lives.

Pick the one that costs you least, and let the rest wait.