Spend More in Retirement? Or less?
BusinessWeek recently ran a story called “Nine Ways Spending Changes in Retirement.” A professor interviewed in the story suggested that retirees “estimate that you will be spending anywhere from 100 to 110 percent of your working budget if you are planning to have an active lifestyle.”
That frankly makes no sense to me unless the retirees in question have no children. Many of the costs my husband and I incur relate to the raising and nurturing of our three kids: College savings. Private school tuition. Enrichment Activities. Clothing. Food. Orthodontist. Five airline tickets for the family vacation. When I look at my spending categories in Mvelopes.com, the online software I use (and the site where I write a column), nearly every category has some connection to children.
And I have daughters. My siblings tell me that their teen boys devour groceries. One of my sisters and one brother each had a son go off to college this past fall; they both remarked over Thanksgiving that the milk went sour for the first time before it could be finished, because there was one less person drinking it. That’s a phenomenon that’s probably rippling through their household expenses: water, power, gasoline for the car… the list goes on and on.
Granted, your kids could move out and you could suddenly replace those expenses with extensive travel, or expensive health care issues. But financial planners I talk to tell me that people who are savers and conservative spenders rarely change their style in retirement.
Is the professor right? Do you think you’ll need the same income in retirement? Or would you eliminate whole categories of spending when the kids leave the nest? Comment here or email me at laura at laurarowley dot com.
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February 15th, 2010 at 3:08 pm
I have a full nest (four sons and a daughter, ages from 17 down to 2). We aren’t living large but our living costs are high because of our big family. I am trying to plan retirement (15-20 years away) but it is hard to judge how much our costs will go down as the kids start moving out. My approach is to keep saving and investing, and just try to stay flexible. If my guesstimate is off, I could just retire later (or sooner). A lot of retirement planning literature seems to assume the kids have already flown the nest, so the calculation of pre vs post ret income doesn’t need to incorporate the change in living costs. –J.J.
Hey JJ, thanks for your comment. Economist Larry Kotlikoff of Boston University has developed financial planning software called ESPlanner that does exactly those kinds of projections. Kotlikoff is a big critic of traditional retirement planning tools (see this column on Yahoo!Finance) and he thinks the tools prompt people — especially those with a lot of kids — to oversave. I’ve tried ESPlanner, but found it somewhat tough for my situation because both my spouse and I have our own businesses, making it difficult to project income into the future. But it might be just the ticket for someone who earns a stable paycheck.
One way I get a handle on kid-related costs is by using the budgeting software Mvelopes.com. (Full disclosure: As mentioned in the post, I write a column for the Mvelopes website, for which I am paid.) I group all of the kids’ expenses — from school tuition to college savings to activities like piano and soccer within a sub-group, so I have a fairly precise idea of how much those outlays are per month, and I can look at that as a percentage of my monthly budget. If I wanted to be more precise, I could probably look at the cost of family travel and tag the medical co-pays that come from the kids (and the orthodontist, who is living large on my monthly annuity). But I figure both my travel and health costs will be higher in retirement.
June 14th, 2010 at 9:04 am
Considering costs of children living at home as a way to determine what costs can be eliminated during retirement is counterproductive. Once you are close to retirement it is likely you will have had quite a few years of empty nest. This is practice to prove how much you actually spend on your own. Interestingly, although food expense is down and other items mentioned in the article, actually basic food shelter and home expenses stay the same. Planning for retirement also means planning to have some debt paid off ,for example, your home. Taxes will increase, inflation and cost of living expenses rise and these things need to be taken into consideration. Health related costs change with Medicare as opposed to your companys health care plan. It still costs alot in retirement. My 84 year old parents spend so much money even though the house is paid off, kids are long gone.
And in reality much of their budget is for necessary expenses. They have a lifestyle that demands high expense. So in retirement we need to look at how much we are going to downsize our lifestyle.