If the recent stock market turbulence has you slashing your retirement budget, it might be a sign that you were relying too heavily on ever-rising asset prices. But new research suggests that spending less as you age isn’t necessarily a sign of poor planning—it’s actually quite common, even among those who plan well.
The Myth of Constant Spending in Retirement
A popular financial theory called consumption smoothing suggests that people should aim for a steady level of spending throughout their lives. This idea, championed by economists like Milton Friedman and Franco Modigliani, argues that a balanced financial strategy means borrowing when you’re young, saving aggressively during peak earning years, and then spending down your savings in retirement. In theory, this approach ensures an even standard of living at all stages of life.
But there’s a catch: No one knows how long they’re going to live. If you plan to spend at a rate that assumes you’ll live to 85 but end up making it to 95, you could run out of money. This uncertainty naturally leads many retirees to be more cautious with their spending.
Why Spending Declines with Age
Israeli economist Menahem Yaari addressed this issue in 1965, recommending that retirees gradually decrease their spending each year. His logic? It helps balance the risk of outliving your money with the possibility of leaving behind excess wealth.
Beyond financial caution, there’s another reason spending declines in retirement: lifestyle changes. A new study by economists Susann Rohwedder, Michael Hurd, and Péter Hudomiet of the RAND Corporation found that as people age, their interest in high-cost activities and luxury items wanes.
The research, based on a long-running survey from the University of Michigan, found that retirees in their 80s generally feel less financially constrained than those in their 50s—suggesting that spending less is often a choice, not a necessity. The study also found that charitable giving and gift-giving actually increase among older retirees. If people were struggling financially, this would likely be one of the first areas to cut back.
Spending Less Without Sacrificing Happiness
Another key finding is that spending reductions happen across all income levels, including wealthier retirees. The decline is most pronounced in those with poor health, who often derive less enjoyment from travel and material goods. However, those in excellent health report greater enjoyment from travel and leisure compared to six years earlier. These individuals also find more satisfaction in giving financial support to others, which contradicts the idea that retirees live in constant fear of outlasting their savings.
Of course, not everyone is financially comfortable. Around 20% of respondents aged 75 and older reported dissatisfaction with their financial situation. While that’s significantly lower than the nearly 45% of those aged 55 to 59 who feel the same, it’s a reminder that financial stress doesn’t disappear in old age.
What This Means for Your Retirement Planning
So, what’s the takeaway for those worried about the stock market and their retirement nest egg? For one, it’s wise to adjust your spending plans based on market conditions instead of assuming uninterrupted growth. But on the bright side, research suggests that most retirees naturally spend less over time without feeling deprived. Instead of fearing an inevitable decline in lifestyle, it’s worth recognizing that your financial needs may naturally decrease as your priorities shift.
Bottom line? Be mindful of market downturns, but don’t panic. The chances are, your future self won’t need to spend as much as you think.
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