Blanchett’s paper is very clearly written making it quite easy to follow his logic:
1. Most studies of safe retirement spending levels assume that spending increases by inflation each year (i.e., flat spending in real terms).Isn’t this great news? If you thought you needed $2 million to retire well, Blanchett says you only need $1.6 million. However, if you see a possible flaw in the logic, I’m with you.
2. Thorough research of real spending data shows that retirees’ spending, on average, does not increase by the full amount of inflation each year.
3. A typical conclusion based on flat spending is that the maximum safe withdrawal rate is 4% at the start of retirement.
4. Using the actual spending curve for the age range 60-95, the safe withdrawal rate at the start of retirement is closer to 5%.
As long as you imagine retirees sitting beside their wheelbarrows full of cash and deciding “you know, I just don’t feel like spending as much this year as I did last year,” Blanchett’s logic seems to make sense. But what if retirees are dragged kicking and screaming into a lifestyle of lower spending by the fact that their savings are drawing down dangerously quickly? Maybe they start to spend less not because they want to, but because they have to.
Blanchett discusses this very possibility midway through Section 5 of his paper:
“What is less clear ... is whether the change in expenditures (i.e., consumption) is by choice or by need. It may be that the reason average expenditures decrease is because the average retiree did not save enough for retirement and is therefore forced to reduce consumption not out of want, but out of need.”Blanchett then goes on to provide strong evidence that spending reductions are indeed forced. He breaks up his sample of retirees into four quadrants, high and low spending and high and low net worth. In the quadrants where both spending and net worth are matched (low-low or high-high), spending tends to drop in retirement, although more so for wealthier retirees. In the low-spending, high net worth quadrant, spending actually rises considerably faster than inflation. The high-spend, low net worth quadrant sees the biggest spending drops.
To summarize, the only quadrant of retirees who have a choice as to whether they can increase spending are the low spenders with high net worth, and they choose to spend more each year. So, a reasonable hypothesis is that the majority of people who spend less as they age do so because they are forced to rather than just wanting to spend less.
Having made this point very well, I thought Blanchett’s paper would head off in a different direction, but this section just becomes a dead end. Section 6 picks up again with the presumption that if most people spend less each year in retirement, that’s good enough for you too.
When you dream about retirement, does it include forced reductions in spending? I have little doubt that this is the fate awaiting most people, but it seems like a strange goal. I’m hoping that as I become less physically capable I’ll have more money available to give my granddaughter free use of my car in return for driving me to my poker games, or to pay my whole family’s way to a vacation with me in Aruba.
At the very least, any recommendation to spend 5% of savings in the first year of retirement should come with the following explanation. “Most people are forced to reduce their spending through retirement as their savings dwindle. I think this is good enough for you too, so go ahead and start spending 5% of your savings in the first year.”