Investing Blog Roundup: Retirement Spending Flexibility

Much of retirement spending research — as well as many financial planning programs — assume that a retiree household will keep spending the same (inflation-adjusted) amount each year throughout retirement. But common sense tells us that retirees probably would not keep spending the same amount, regardless of whether the portfolio is growing quickly, shrinking quickly, or holding steady.

David Blanchett highlights a recent survey of 1,500 defined contribution (DC) retirement plan participants between the ages of 50 and 70, which found that respondents were much more capable of cutting back on different expenditures in retirement than the conventional models suggest. Blanchett writes, “For example, only 15% said a 20% spending drop would create ‘substantial changes’ or be ‘devastating’ to their retirement lifestyle, while 40% said it would have ‘little or no effect’ or necessitate ‘few changes.'”

And when you account for that flexibility, an assortment of financial decisions surrounding retirement need to be adjusted. The decisions that make sense for a household that intends to never adjust their spending (other than to match inflation) are different than the decisions that make sense for a household that has spending flexibility.