In this video, Ty Bernicke, CFP®, President & CEO, challenges traditional retirement planning assumptions and discusses why many people may be able to retire earlier than they think. He explores the concept of changing spending patterns throughout retirement and how this could impact retirement planning strategies.
Hello, everybody. My name is Ty Bernicke and today I’m going to talk to you about why I believe many people can retire earlier than what they thought was possible.
The Flaw In Traditional Retirement Planning
The reason I believe that many people can retire earlier than they thought possible is what I would call a flaw to traditional retirement planning.
Traditional retirement planning assumes that your average person needs a certain level of income when they first retire, and in this example, will assume that they need about 120,000 a year. But if they need 120,000 in the first year of retirement, traditional planning assumes that inflation is going to go up and people are going to need a little bit more each year to maintain a consistent lifestyle, as shown in this graph.
Spending Trends in Retirement
And you can see 30 years down the road, the amount of money that a person would need to maintain the same lifestyle under traditional retirement planning more than doubles 30 years down the road.
Now, the reason I don’t agree with this initially started because we noticed that our retired clients didn’t spend incrementally more as their age increased throughout retirement. In fact, the real spending tended to decrease.
Not only have we found this, but every year the Bureau of Labor Statistics does something called the Consumer Expenditure Survey, and they have found the same thing, that people tend to have their peak spending years in their late 40s and early 50s, and then their spending tends to decrease as their age increases throughout retirement.
Insights from Consumer Expenditure Surveys
And that always made sense to me intuitively that that was the way it worked. But that’s not the way traditional retirement planning works. It assumes that your spending just goes up every year, and that can have a big impact as it pertains to what age you can retire when you’re doing your planning on this topic.
And the next question would be, well, why? Why do people tend to spend less? When you look at that consumer expenditure survey, maybe those people are spending less later on retirement because they don’t have money to spend because their nest egg is gone. Well, that argument really doesn’t hold weight because the fraction of people satisfied with their economic situation is considerably higher at older ages than at ages near retirement.
Implications for Early Retirement Planning
So again, as people age, they’re more comfortable with their financial situation, which would be all the more reason why they should spend more if they had the level of activity that they had in their younger years, they simply don’t. And so this study was done by the National Bureau of Economic Research. So again, this isn’t me saying this. This is actually bureaus that are doing this testing.
So the reason that we initially started changing the way that we did traditional retirement planning was because of this information that I just shared with you, and we actually wrote two articles on this. You can find both of them online, but one was for the Journal of Financial Planning and one was on this topic for Forbes.
But I think there are so many people we’ve met with throughout the years that get one story from one program they used on the internet, or one advisor that did a retirement income projection for them that assumed that their spending had to increase each year throughout retirement, when in reality, that typically isn’t the way it works for the average person.
But if this is something that you’re thinking about doing, it’s very important to look at what your income streams are. Your tax minimization strategy, when and how to take Social Security. What are you going to do for health insurance prior to age 65 when Medicare kicks in? All of these different areas of financial planning changes quite a bit if you do retire earlier than age 65 or at a younger age.
Have retirement questions?
Schedule a quick 15-minute call with one of our financial advisors to discuss your most pressing questions related to retirement: bernicke.com/consultations
You can also reach us directly at (866) 832-1173.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
