By Scott Burns
Take cheer. There is a good chance you can party more today because research shows you’ll be partying less tomorrow.
That’s the uncouth summary of some recent research published in the Journal of Financial Planning, February issue. The work of two Widener University associate professors, Kenn Tacchino and Cynthia Saltzman, the article questions a primary assumption made in virtually all financial planning models— that you and I will set a retirement spending goal and never change it. If we are hoping to have retirement income at 80 percent of our pre-retirement income, the conventional wisdom goes, we’ll want the same income at age 70, 80, and 90 as we want at age 55, 60, or 65.
Not so, the researchers found. As people age they reduce their spending— and they do it voluntarily. As a consequence, virtually all the financial planning models in current use overstate how much we need to save to reach a stated goal.
“This doesn’t get people off the hook for saving”, Professor Tacchino said in a recent telephone interview. “But I want people to feel there is hope. It’s a do-able thing. This (approach) may make the task (of retirement saving) less intimidating and make people less likely to just give up.”
I asked what had provoked the research.
“I’ve been teaching and working in the retirement field a long time and I can see the deficiencies in the accumulation models. It just isn’t true that people consume at the same rate all their lives. At some point, usually in their eighties, the retiree settles into a sedentary life. Put it this way: next time you are on a jet plane, look around for 80 year olds.”
But what about things like rising medical expenses?
“It’s always been assumed that medical expenses would increase to offset any decline in consumption spending. But that isn’t so. The out-of-pocket (medical) expenses of retirees are significant but not overwhelming… Retirees who are properly insured with Medi-Gap insurance, etc. can be most confident about future medical expenses.”
To test his thesis, Professor Tacchino asked his colleague economist Cynthia Saltzman to examine the Consumer Expenditure Surveys and see how spending actually changed with age. She found that people 75 and older have virtually the same income as those 65 to 74 but spend less in almost every category. While health care spending rises, spending on food, clothing, transportation, and entertainment all declines. (The table below shows the figures for three retirement income groups.)
How Spending Falls for Very Senior Citizens
| Category | Over $40,000 | $30,000-$39,999 | $20,000-$29,000 |
| Food | -31% | -23% | -25% |
| Clothing | -42% | -24% | -44% |
| Transportation | -34% | -46% | -20% |
| Health Care | +34% | +31% | +41% |
| Entertainment | -51% | -46% | -37% |
Source: Journal of Financial Planning, February 1999
As you might expect, they also found that retirees with higher incomes had more room for expenditure reductions because they were starting from a higher base. Those with incomes of $40,000 or more, for instance, reduced spending from $43,967 at age 65 to 74 to $36,825 when they were 75 or older. (See table below.)
How Spending Changes for Incomes over $40,000
| Category | 65-74 | 75+ | Change |
| Food | $ 5,779 | $3,970 | -$1,809 |
| Housing | $12,027 | $9,678 | -$2,349 |
| Clothing | $ 2,160 | $1,256 | -$ 904 |
| Transportation | $ 8,185 | $5,428 | -$2,757 |
| Health Care | $ 2,385 | $3,189 | +$ 804 |
| Entertainment | $ 2,108 | $1,027 | -$1,081 |
| Pers. Ins./Pensions | $ 4,540 | $2,678 | -$1,862 |
| Total* | $43,967 | $36,825 | -$7,142 |
Source: Journal of Financial Planning, February 1999 *Note: minor categories are not reported, categories do not sum to total.
When I spoke with Professor Saltzman about the research, I asked what finding surprised her the most. “The reviewers said that our data set was based on Depression Era people. Baby Boomers, they said, might be different. So we examined that (by going further back in the CES surveys) and found that their spending patterns weren’t all that different. The Boomers had more income. They spend more on housing and have bigger mortgages. But otherwise they were quite similar at the same age.”
So how much should saving be adjusted?
It all depends.
Pressed, the researchers said that if they had to pick a number it would be a 30 percent reduction in saving. But they were quick to point out that the adjustment depended very much on life expectancy, savings period, inflation assumptions, etc. Some reductions would be more, some less.
The bottom-line?
If you’ve given up, don’t. The impossible may have become possible.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by PhotoMIX Ltd. from Pexels
(c) A. M. Universal, 1999