The Midlife (Spending) Crisis.
The problem with many retirement calculators and spending rules is that they assume that life is fixed and static.
In fact, life and spending are often complicated.
JP Morgan’s Guide to Retirement has a neat breakdown of how spending tends to change for retirees as they age.
These are the average spending levels for retired families with $250k-$750k of investable assets:
These are the average spending levels for retired families with $1-$3 million in investable assets:
Prices don’t mean anything like trends. You may see higher spending rates near retirement age and then lower as you get older.
This trend is supported by BLS data and:
This starts early and shows an increase in income as you get older, peaking in your 50s and then slowly falling from there.1
The reasons for this are obvious.
You usually have more responsibilities in your 40s and 50s. Maybe your kids are still getting paid. Maybe you’re paying college tuition. You may have elderly parents who need help.
You are in your prime earning years so there is also a lifestyle.
Your spending habits are higher in the early years of retirement because your health is also improving. It’s a lot harder to move in and out in your 70s and 80s than in your 50s and 60s.
Harvard researchers looked at the relationship between health, life satisfaction and consumption in a piece called What Good Is Wealth Without Life?
It’s no wonder that your life satisfaction decreases when you’re not healthy. But look how the gap widens if you want to spend more money when you’re sick:
Here are my main takeaways from all these charts and data:
Use it if you enjoy it. Many retirees do not want to spend money because they are afraid to outlive it. But when your wealth reaches its peak when your life begins to fail money does not bring much satisfaction.
You should spend more money if you have the ability to enjoy it.
A bigger pile later in life can’t bring you back your healthy years.
You should have multiple retirement plans. When partner Tony Isola does retirement planning for clients he prioritizes a spending plan for the first decade to account for the fact that many people die before wealth.
Planning for retirement should take into account how your lifestyle will change as you age.
Maybe your value should go up faster. Spending is high in the 50s for the average family but I think the high water value comes sometime in the age range of 60s to 70s.
I’ve been thinking lately that it might make sense for your net worth to increase in your 50s if the way you spend money is.
Spend some of your money while you are healthy. Spending is likely to decline in your 70s and 80s, when it’s not comfortable to travel and work.
When your life goes by, all you have are your memories of the experience that worked.
Create while you can.
Further reading:
How to Beat the 4% Rule.
1Interestingly, research shows that your happiness tends to decline in middle age and when you spend more money.
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