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How To Balance Your Lifestyle and a Safe Withdrawal Rate in Retirement

Retirees may not need to take a fixed real withdrawal amount over their retirements. Here’s why.

How to Balance Your Lifestyle and a Safe Withdrawal Rate in Retirement

A Must-Know for Retirees: Factor In Lifestyle Considerations

Christine Benz: Lifestyle considerations are the next key takeaway as we think about the conclusions that we can use to inform starting safe withdrawal rates. So, this is what’s been called the retirement spending smile. This is a piece of research that my former colleague David Blanchett produced that examined the trajectory of actual retirement spending over people’s retirement time horizons. And what the research concluded is that in contrast with that base case that I mentioned we use when we’re thinking about starting safe withdrawal rates, when we look at actual retiree spending, we see that spending starts higher and that often coincides with people’s good health years, where there’s pent-up demand perhaps to do travel, and then we see that spending tend to decline in the middle to late retirement years, and then it often elevates later in retirement, often in keeping with uninsured healthcare expenses, uninsured long-term-care expenses, higher prescription drug costs, and so on. This is, I think, in a lot of ways a statement that that base case that we use is a little bit of a straw man because it doesn’t depict how retirees actually spend. I mentioned much of the research assumes that fixed real expenditure pattern, but we see when we look at the data, when we look at David Blanchett’s data, we see that decline throughout the middle to later years of retirement.

Takeaways for Spending Rates

How do we take this research and marry it with our research on safe withdrawal rates? One conclusion that you can come away with is that when we model in that lower spending in the middle to later years of retirement, that pattern that many older adult households exhibit, when we model that in, that translates into retiree spending increasing about a percentage point less than the inflation rate per year. So, I mentioned in our base case, we’re assuming the full inflation rate. What we see when we look at actual retiree spending is that their own spending actually increases by a bit less. So, if we model that in, what we can see is that that translates into a higher safe withdrawal amount.

I want to direct your attention to the far right-hand column there. That looks at starting safe withdrawals for people who are assuming that they will take a percentage point less than the actual inflation rate as the years go by in their retirement. And you can see that that translates into a higher starting safe withdrawal rate because the bargain is that you will take a little bit less than the inflation rate as the years go by. That’s one reason why, if you think about the spending smile, that argues for a higher safe withdrawal than would be the case if you assumed that someone is taking that fixed real withdrawal over the whole retirement time horizon. But before retirees take this and run with it, they just need to be comfortable with their end of the bargain. So, yes, it suggests that withdrawals early on in retirement in those pent-up demand years can be higher, but it does necessitate lower spending as retirement unfolds. It’s also important to think about someone’s own health situation, and specifically the plan for long-term care and whether there is a plan for long-term care. If there is not a plan for long-term care and the older adult could see a significant spike up in spending later in life to cover those uninsured long-term-care costs, that argues for being a little bit more conservative with those starting safe withdrawal amounts.

Watch “5 Must-Knows About In-Retirement Spending” for the full webcast from Christine Benz.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. She is also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement (Sept. 2024, Harriman House). She co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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