Sighting: How Goes Your Spending in Retirement?

You need a bazillion dollars to retire and you're not saving enough. That's a rough summary of the financial industry's collective message to you today. At least one brave financial planner isn't buying it though. In a recent Journal of Financial Planning article, Ty Bernicke made waves by asserting that since seniors spend less as they age, traditional financial planning projections are overstating their retirement savings needs.

In a nutshell, he makes the case that seniors voluntarily spend less almost across the board as they age. The one big exception to that is health care. As a result, he thinks the traditional calculations of retirement income needs (say, 75% of your pre-retirement income as a starting point, with that going up 3% per year for inflation) are overstated. His contention is that if income projections more closely matched normal senior spending patterns, people would be able to retire earlier with less money, or at the very least feel increased liberty to spend more freely in the early years of retirement. Scott Burns, a well-known columnist for the Dallas Morning News, agrees, and has written on why spending decreases—substantially—in most budget categories as people age.

It took some courage for Mr. Bernicke to publish that article. He's likely to catch flak from the financial industry, whose goal naturally is to get you to save and invest (with them) all you possibly can. It's also a little scary going against the conventional wisdom in suggesting to people they may be better off than they think, and may not need to save as much as a result. The fear, of course, is that you're going to give someone a more liberal standard, and then have it turn around to hurt them in the long-run.

With that in mind, we think it's worth considering this new idea as you ponder your retirement saving. But don't overdo it. So much of the future is unknown: your financial needs, rates of return, inflation, health, etc. Because there are so many unknown moving pieces, you probably still want to build using fairly conservative projections—that you won't earn quite as high a return as you hope, that inflation may be higher than projected, and that your spending could be a bit more than you expect.

That's where the beef with Bernicke's article, if there is one, should be. By assuming your spending will decline throughout retirement like he projects, you're not taking a conservative approach. If his optimistic scenario doesn't play out in your particular case, you don't have a buffer to help make sure you and your spouse are still well provided for. All in all though, his findings are going to be a breath of fresh air for a lot of people, giving them hope that maybe they really can cobble together enough to manage a comfortable retirement after all. Even if they'll never accumulate a bazillion dollars.

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