Why does Retirement Feel Expensive?

Over the years, we’ve been exposed to countless presentations on how financial advisors model retirement plans for their clients. Despite the common disclaimers that each plan is unique and tailored to individual circumstances, we’ve noticed a striking consistency: most advisors still rely on the 4% Rule as their primary strategy. This observation persists across the board, even as advisors emphasize the customized nature of their services.

In essence this rule states that retirees can withdraw on average 4% of their savings each year and then adjust for inflation each year after for up to 30 years. Keep in mind this is a guideline – it does not factor in your tax bracket, what you are comfortable with, unexpected medical expenses, and several other factors.

When we consider this, it seems fairly reasonable at first glance – but as with many investing strategies it does not account for human behavior. In a 2019 study J.P.Morgan found there were some behavioral factors worth examining. They published the results in what they called the Three Retirement Surprises.

The Key Takeaways:

1. Retirees often spend more right after retirement on travel and hobbies
2. This high spending early in retirement, combined with market instability, can harm long-term finances
3. Retirees face fluctuating expenses due to unexpected costs

These may not seem surprising to read but the study is important in highlighting that the 4% rule may not be flexible enough to be relied upon. There is often a period of adjustment in retirement and for some there is an overwhelming sense of freedom. After years of the alarm going off, the long commute, eating lunch at your desk, you suddenly have to pinch yourself knowing you can do whatever you want on your own schedule.

You can imagine that in the beginning you may want to go out for meals more often, meet up with friends, travel, take on new projects…all of this costs money. During our working years we are spending at a fairly steady rate, some of which can be attributed to having a routine. When that is gone, most new ventures will result in some extra spending. Plus, you are most likely not saving at the rate you used to, if at all.

After a few months of freedom and fun you start to realize this new lifestyle cannot last forever – then the adjustment period begins. As you begin to reign in your spending, you also realize there no paycheck to go back to and your savings is lower. Suddenly retirement just isn’t as much fun and is bringing a new wave of concerns.

Don’t despair, we aren’t trying to cause panic – just know this is completely typical and the good news is with some planning, budgeting, and the awareness of these phases of retirement you will end up with a clear path to your new normal.

To prepare for these challenges, consider:

1. Creating a flexible budget that accounts for higher spending in early retirement
2. Building an emergency fund for unexpected expenses
3. Regularly reviewing and adjusting your withdrawal strategy

Remember, while the 4% rule can be a useful starting point, it’s crucial to develop a more nuanced, personalized approach to retirement planning. Consider consulting with a financial advisor who understands these retirement surprises and can help you create a plan that adapts to your changing needs throughout retirement.

Next week we’ll take a look at the follow up study done this year on retiree spending and what happens when one spouse retires before the other…