When calculating how much money we need to retire, Americans tend to assume we will spend less in our golden years than when we are working. It's true that commuting costs should shrink, but having more leisure time gives us more time to spend money. New research is throwing cold water on the theory that retirees spend less money when they leave the work world.
"Once we remember the understanding from Roman times from philosopher Cato, 'Cessation of work is not accompanied by a cessation of expenses,' then we can begin the focus on maintaining our lifestyle in retirement even as the cost of the goods and services that we will need to maintain our lifestyle will increase," says Dan Crimmins, a Financial Adviser at Crimmins Wealth Management in Woodcliff Lake, NJ.
In an exclusive MoneyTips online survey, 452 Americans were asked about spending before and during retirement.
We asked the subjects yet to retire:
More than 1 in 3 (37.6%) plan on cutting their spending by more than 20% in retirement, and more than 2 in 3 (69.6%) believe they will cut outlays by at least 10%.
How realistic is that? We consulted with those in the know, people who had already retired, asking them about their spending cuts.
By comparing the two graphs, it's easy to see how tomorrow's retirees are overly optimistic. While 37.6% of future retirees plan to cut spending by more than 20%, only 27.9% of current retirees achieved that lofty goal. Similarly, 32.0% of tomorrow's retirees plan to cut outlays between 10% and 20%, but only 24.8% of retirees surveyed have been able to achieve that.
The smallest group among future retirees (11.3%) contained those who planned to cut spending less than 10%. A larger group of current retirees, 15.9%, hit that mark. Nearly 1 in 5 of future retirees (19.1%) planned not to cut expenses, which was close to the actual percentage among today's retirees (22.5%). The big surprise was that nearly 1 in 11 current retirees (8.9%) admitted spending more in retirement! In all, nearly 1 in 3 (31.4%) retirees were NOT spending less than they had previously.
"The results are not a surprise for me," admits Crimmins, a frequent MoneyTips contributor. "The one item that all seem to overlook is that – regardless of their attempt to hold down spending in retirement – everything that they need to purchase in retirement will rise over time due to inflation. This fact is important to recognize and understand."
When we broke down the data by gender, we saw that women are better at cutting spending significantly than men are. Nearly 1 in 3 women (33.1%) reported cutting spending by 20%, but only about 1 in 5 men (22.1%) did. 70.6% of the women reported cutting expenses somewhat, squeaking by the 66.4% of the men. A greater percentage of men also admitted spending more in retirement: 11.5% vs. 6.6% of the women.
Not surprisingly, it appears the people with the lowest family incomes are the ones who cut spending the most. More than 3 in 5 (61.5%) of the people in families earning less than $30,000 annually cut their spending by more than 20%. Only 3.2% of the people in families earning more than $100,000 annually reported that much savings.
"Generally, people believe that they will not spend as much in retirement, but in reality, most continue to try and live the same lifestyle in retirement as when they were working," says Crimmins. "With more time to live this lifestyle, their total expenses are generally the same especially for the wealthy clients as your survey captured.
"It is important to understand the starting point of expenses the first year in retirement will not be sufficient as time marches on. In order to maintain our lifestyle throughout retirement, we will need to keep pace with the increasing costs of everything we will need to purchase. Setting a realistic starting point to allow for this anticipated increase will be important."
Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k). Make sure that your 401(k) is maximizing its potential with this free analysis that checks your fees, fund mix, and other factors to help you hit your retirement goals. For more of our exclusive retirement data and insights, visit MoneyTips Retirement Survey Findings.