One final study should be considered to help shed light on retirement spending patterns and which default assumptions could be appropriate for different types of retirees. In August 2015, J.P. Morgan Asset Management released a study about retirement spending by Katherine Roy and Sharon Carson.

Their dataset provides a “big data” analysis of 613,000 U.S. households led by people fifty-five or older who were estimated by the researchers to have managed most of their household finances through banking services at Chase (debit and credit cards, pay mortgages through bank account, etc.).

In analyzing the expenditures for their diverse consumer base, they identified four retirement spending profiles and an additional category of miscellaneous individuals. These are the profiles they found:

Foodies (39% of households): The largest category of the population tend to be fairly frugal in retirement, with the lowest overall spending. The category name comes from the fact that 28% of their expenditures are in the food and beverage category, including purchases at large box stores or online retailers.

Foodies tend to have lower housing expenditures as they have paid off their mortgage and have limited property taxes. Foodies also tend to spend less as they age. The authors conclude that while foodies should separately account for health expenditures, they can otherwise reasonably plan for their spending to decrease as they continue through retirement.

As will be more clear after describing the other categories, foodies may be the only group that can plan to be reasonably well-served by a retirement spending smile expenditure pattern.

Homebodies (29% of households): This group tends to spend much more on housing in retirement than others. Some may still have a mortgage, but even for homebodies without mortgages, there can be significant expenses for property taxes, ongoing maintenance, repairs, furnishings, and utilities.

Homebodies may be maintaining a large home, and their expenses may be more likely to keep pace with inflation. For instance, as homebodies age, they may require greater expenditures on home maintenance and chores for activities they are no longer able to manage on their own.

For homebodies, getting a sense of future retirement expenses can require making clear plans about future housing: When will the mortgage be paid? Is there a second home that may be sold? What portion of the budget consists of property taxes and utility bills? What are future plans for downsizing or further renovating the home?

Globetrotters (5% of households): This category of households spends much more on travel and has the highest overall expenditures of any category.

Globetrotters represent 11% to 13% of households with at least $1 million of investment assets. Spending does not seem to decline much with age: the proportion of globetrotters in the population stays consistent at the age seventy-five-plus range, and expenditures on travel are also the highest for this age group.

The authors conclude that globetrotters should probably work from the assumption that their retirement spending will keep pace with inflation, making it more dangerous for them to plan in advance to follow a retirement spending smile type of pattern.

Health care spenders (4% of households): For this group, health care expenditures reflect 28% of income. Expenditures include Medicare-related expenses and prescription costs. As health care expenses tend to rise faster than the overall inflation rate, those who are part of this category must take care to adequately project their health care expenses.

The forces that create the upward spending tick in the retirement spending smile could happen sooner, and overall spending could possibly increase faster than average consumer inflation.

Snowflakes (24% of households): The remaining households reflect more unique types of experiences that cannot be categorized more generally.

And so, what is the best baseline assumption to use: constant inflation-adjusted spending, decreased spending, or a retirement spending smile as you age? This is a big question that is still not fully resolved.

We need to track individual households over time in order to better see the variety of spending patterns and how they relate to personal characteristics of the household.

What percent of households voluntarily reduce their spending? What percent are forced to increase spending due to entering a nursing home or experiencing large medical bills? Are their personal characteristics linked to different spending patterns that could help retirees find better assumptions?

For instance, higher net worth retirees may have much larger discretionary expenses when they enter retirement, while a more typical retiree may find that most of their spending is for essential needs which will not be reduced and must adjust with inflation.

The research by Roy and Carson moves the farthest in analyzing these sorts of questions, but one would still be hard-pressed to develop a personalized spending plan based on their findings. A clear point, though, is that those who plan for greater expenses related to travel, housing, or health care should expect their spending needs to keep pace with inflation.

Spending may decline, so I would not fault anyone for using assumptions of gradual real spending declines such as 10% or even 20% over the retirement period. But pending further research developments, I would avoid moving too far in the reduced spending direction as a baseline assumption.

Though the inflation-adjusted withdrawal assumption could be improved, it builds in reasonable conservatism and may not be too far off as a baseline for many retirees, even if the average retiree experience suggests otherwise.

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