It’s common to assume that retirement expenses will rise steadily each year due to inflation. But research suggests otherwise. In fact, many retirees spend the most in the early years of retirement—and then gradually spend less as time goes on.
Why This Matters
If you’re projecting your retirement budget by simply adding 2–3% inflation every year, you may be significantly overestimating how much you’ll actually need.
What the Data Shows
J.P. Morgan study of 50,000 retirees found that annual expenses tend to decline gradually throughout retirement. This drop in spending can offset much of the impact of inflation. Some notable findings include:
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- Spending typically peaks in the first few years—often due to travel, hobbies, or home improvements.
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- Most categories of spending decline over time, except for medical costs.
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- Medical expenses rise later, but the increase is generally modest and doesn’t outweigh the overall decline in other spending.
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- 60% of retirees see year-to-year expense changes of more than 20%. However, by age 75–80, spending levels tend to stabilize for about 35% of retirees.
These findings challenge the traditional “one-size-fits-all” approach to retirement planning.
A Smarter Approach: Create a Dynamic Spending Plan
Rather than assuming fixed annual increases, consider building a flexible spending plan based on the natural stages of retirement:
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- Go-Go Years (60s to mid-70s): Active lifestyle, travel, and discretionary spending are at their peak.
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- Slow-Go Years (mid-70s to early 80s): Activity levels decline, and spending shifts more toward essentials.
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- No-Go Years (80s and beyond): Travel and entertainment decrease further, while healthcare becomes the primary expense.
Or Use the “Spending Smile” Model
Another useful framework is the Spending Smile:
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- Discretionary spending gradually decreases with age.
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- Healthcare spending increases in later years.
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- The combined effect forms a smile-shaped curve—higher spending early and late, with a dip in the middle.
Key Takeaways
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- You may not need as much retirement savings as you think.
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- A dynamic, stage-based spending plan is more realistic than simply applying an inflation rate to the first year’s expenses.
Retirement planning shouldn’t be rigid. Tailoring your plan to your lifestyle and activity level can lead to a more fulfilling—and financially secure—retirement. If you would like to explore what this could mean for your retirement, we’d be happy to help you create a plan that makes sense for you.