Spending in Retirement

Abstract

Retirement savings adequacy estimates are often based on the assumption that individuals spend the same amount every year in retirement, and that the withdrawal rate to fund spending is based on spending down a percentage of retirement savings. We simulate safe consumption rates and compare the amount that wealthy retirees are spending to the amount they could safely spend given different asset return assumptions and investment portfolio allocations. Retirees in the top quintile of financial wealth are spending nowhere near an amount that would place them in danger of running out of money. In fact, the average financial assets of wealthy retirees increased during this time period and most retirees spent less than their income. Setting aside 40% of financial assets to cover uncertain longevity, medical costs, and bequests still results in a consumption gap as high as 47.3.% among higher-wealth retirees.

Keywords: Retirement spending, consumption

JEL Classification: D14