Will Your Spending Shrink in Retirement?

By Justin Pritchard, CFP®

It’s pretty obvious how reducing your spending can improve your chances in retirement. But you might be skeptical about how realistic it is to cut spending.

For example, you might want to adjust to a market downturn by tightening the belt, or you might just want to plan for gradually reducing your spending, such as under the Go-Go, Slow-Go, and No-Go years.

Those adjustments can be powerful. If you’re running low on resources, seemingly small adjustments might make a difference.

So, do people actually spend less in retirement?

Several sources suggest that they do. We’ll review how actual people think and spend, and this may help to illustrate how your spending might unfold. That said, you might not experience the same thing as others, so you’ll need to run some numbers and accept the fact that the future is uncertain.
Continue reading below, or get similar information from this video.

Is a 20% Cut Feasible?

A first observation comes from a survey by PGIM and David Blanchett, who may be best known for the retirement spending “smile.” That spending pattern is essentially inflation minus 1%.

More recently, Blanchett asked workers how significant a 20% cut in spending would be. Roughly 40% of respondents said that this would not be catastrophic. However, others expected a more meaningful impact.

That survey covers what people said, but we also have data showing what they actually do.

Survey of Consumer Expenditures

The U.S. Bureau of Labor Statistics (BLS) publishes information about how much people spend each year. Those numbers are broken down by age, and we can look at how people in typical retirement age ranges change their spending over time.

Note that these numbers are averages, and of course, the actual spending levels would vary based on your geography, health issues, lifestyle, and more.

Still, we can see how spending tends to decline with age starting in your 60s or 70s. This would be consistent with the retirement spending “smile” or the Go-Go, Slow-Go, and No-Go framework of retirement spending.

Table showing spending by age from BLS data

Bank Spending Data

We can also learn a lot from bank account transactions. JP Morgan analyzed spending data from Chase Bank customers (the data is anonymized, of course) to see where money goes at different ages.

Once again, there seems to be a reduction in overall spending over time once people enter their retirement years. Some categories, such as healthcare, continue to rise. But other categories gradually taper down.

Chart showing spending in various categories by age group

It may be surprising to see that healthcare costs don’t run off the charts as people age. It’s true that healthcare spending can be problematic in retirement. But for many people, Medicare covers the bulk of costs. You can potentially limit your out-of-pocket expenses to some degree by purchasing insurance.

Why Does it Matter?

A realistic understanding of spending is critical as you plan for retirement. If you assume that all costs will continue to rise uninterrupted, your projections may be skewed. For example, you might believe you need more money than you’ll really need. As a result, you may need to work longer, save more, or make other sacrifices.

Of course, nobody knows the future. It’s wise to be conservative and enter retirement with sufficient resources. Indeed, for most people, it’s probably better to have too much than not enough. But making informed decisions might help you get closer to the “right” amount, if such a thing exists.

Tips for Planning

As you run your projections, consider the potential for changes in your spending. Use tools (software, most likely) that can model things like:

  • The retirement spending smile: Inflation minus 1% on base expenses, with healthcare costs continuing to rise at an accelerated rate
  • Go-Go, Slow-Go, and No-Go years: Higher spending levels immediately after retirement, when your health is at its best and you’re eager to try new things. After a number of years, spending might decrease somewhat, with the potential for further decreases later.
  • Guardrails: Adjusting spending according to your account balances. If your assets fall below certain levels, it might make sense to tighten the belt, at least temporarily. If your assets eventually recover (or if they do nothing but grow over time), then increases may make sense.

It’s also smart to understand which expenses are necessities vs. nice-to-haves. For necessities, spending cuts are a problem. But discretionary spending might be more flexible, potentially allowing you to rebuild after catastrophic events.

The more flexibility you have, the more options you have. For example, if you’re willing and able to cut your spending, it might be possible to start spending at a higher rate. It might even be possible to retire earlier than otherwise. But it’s critical to be able to absorb those surprises and make cuts later.

Important: There is no guarantee that dynamic spending or cutting your expenses can prevent you from running out of money or suffering hardship in retirement. The practice might help some, but life is uncertain, and spending cuts ultimately might not succeed in getting things back on track.