Spending Habits in Retirement
How much money do people in retirement actually spend each year?
Or better asked, how much do they withdraw from their investments to recreate their paychecks after they stop working?
The answer to this question can help pre-retirees think about how much they actually need to save to prepare for their own retirement.
You might need to save less for retirement than you think.
A lot of people I speak with who are thinking about retiring soon don’t know if they’ve saved enough.
Specifically, they are unsure about how much money they will need to live off of and whether or not their investment portfolio will accommodate that withdrawal need.
I often think about and share the findings of a 2018 study done by the Employee Benefit Research Institute on spending habits of retirees during the first 20 years of retirement.
How much do average retirees withdraw from their investments?
Retirees with less than $200,000 in assets (not including their home) spent down around 25% of their savings in the first 18 years of retirement.
Individuals with between $200,000 and $500,000 heading into retirement spent a little more than 27% of their portfolio.
Retirees with $500,000 or more at retirement spent less than 12% of their nest egg within the first 20 years of retirement (on a median basis)!
People with a pension spent the least from their portfolio with assets down an average of just 4% (versus a 34% decline for those without pensions).
The median household in this study simply spent the income from their portfolio and avoided taking from the principal portfolio balance.
While some retirees do spend down most of their assets in the first eighteen years following retirement, about one-third of all sampled retirees had increased their assets over that period.
This study ultimately shows that many retirees overestimate how much they need to save to retire.
In addition, the study represents—however counterintuitive—the psychological challenge of actually spending money in retirement.
Most of us may fear outliving our money in retirement, but a sound financial plan can help you mitigate that risk, prepare for the unexpected and enjoy the retirement you worked so hard to earn.
Are you ready to plan for your retirement? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.