How much does spending typically decline during retirement?

Spending often declines in real, inflation-adjusted terms through much of retirement, but the amount varies widely. In David Blanchett’s earlier research, a household beginning retirement with $100,000 in annual spending was projected to see average real spending decline to about $74,146 by age 84, or nearly 26%. That example is a research-based illustration, not a universal spending benchmark for every retiree.

Does the retirement spending smile apply to every retiree?

No. The retirement spending smile is an average pattern, and individual results can vary substantially based on health, income, housing, family circumstances, lifestyle, and longevity. Some retirees may see spending decline steadily over time. Others may face large late-life healthcare or long-term care expenses that increase spending. Recent research suggests that these individual healthcare shocks may help explain why average spending can rise later in life even when median spending continues to fall.

How should financial advisors use the retirement spending smile in retirement planning?

Financial advisors can use the spending smile as one input when testing whether a client’s retirement plan reflects changing needs over time. Rather than assuming every expense increases with inflation each year, advisors can separate essential expenses, discretionary early-retirement spending, and potential late-life healthcare costs. This can support a more flexible withdrawal approach, but a plan should still account for uncertain healthcare expenses, longevity, market returns, inflation, taxes, and personal goals.

What Is the Retirement Spending Smile? How It Impacts Retirement Planning

Q: What is the retirement spending smile?

The retirement spending smile describes an average pattern in which inflation-adjusted household spending starts relatively high in early retirement, declines through the middle years, and may rise later as healthcare and long-term care costs increase. When average spending is charted over time, the pattern can resemble a U-shaped curve, or a smile. Recent research also finds that median retiree spending may continue to decline in later life, creating more of a smirk than a smile.

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What Is the Retirement Spending Smile? How It Impacts Retirement Planning | Dunham