Tuesday, February 9, 2021

Declining Spending as We Age

As we age in retirement, our inflation-adjusted spending declines.  This fact has been established in numerous academic studies.  The question is how we should incorporate this information into our retirement planning.  Former chief actuary at Morneau Shepell, Frederick Vettese has an answer to this question in the second edition of his excellent book, Retirement Income for Life.  Here I lay out the consequences of this answer in concrete terms.

In Vettese’s earlier book The Essential Retirement Guide: A Contrarian’s Perspective, he wrote that our tendency to spend less as we age means we can assume that retirement spending “does not have to be indexed to inflation.”  I argued that this isn’t reasonable because some of the spending decline measured in academic studies comes from some retirees who spend too much early on and dwindling savings forces them to spend less later.

In the first edition of Retirement Income for Life, Vettese changed his assumption to an annual 1% decline of inflation-adjusted spending in one’s 70s and an annual 2% decline in one’s 80s.  This amounts to about a 13% reduction in the present value of lifetime retirement spending.  He kept the same assumption in the book’s second edition.  Most of my concerns about the academic study data still apply to his justifications of this spending pattern.

A Concrete Scenario

Let’s leave the academic discussions and look at the implications of Vettese’s spending pattern.  Suppose you are married and retiring at 65 with the plan to spend $60,000 per year initially.  This includes CPP, OAS, RRIF withdrawals, and all other sources of retirement spending.  Suppose further that you have two couples as neighbours who are in the same socioeconomic class as you are, but one couple is 55 and the other is 45.

As a result of the progress we see in society over the decades, wages rise faster than inflation.  Let’s assume that wage increases will exceed inflation by 0.75% per year.

Now fast-forward 10 years.  Adjusted for inflation, your plan has you spending $56,000 per year at age 75, while your neighbour who is now 65 is spending $65,000 per year.

Now fast-forward another 10 years.  Adjusted for inflation, your plan has you spending $48,000 per year at age 85, while your other neighbour who is now 65 is spending $70,000 per year.

Is this Reasonable?

If this sounds sensible to you, then by all means, plan for significant spending declines during your retirement.  I suspect, though, that if we could modify academic studies to remove data from people whose spending declines were forced upon them, we’d see age-related spending declines begin later in life and be less severe.

My own choice is to assume my spending will keep up with inflation, so that the only decline I’ll see is that my spending won’t keep up with rising wages.  However, I could see using an assumption of a 1% annual spending decline from age 75 to 90 as quite reasonable.  This is about half the decline Vettese uses.

Vettese has an interesting theory about why so few planners take into account spending declines: “If we fail to acknowledge the true spending patterns of older retirees, political correctness may have something to do with it.  The mere suggestion that older people don’t need quite as much money can come across as senior-bashing.”  He may be right about some planners, but this isn’t my motivation.

I don’t want to overstate the importance of this issue.  I consider my disagreement with Vettese on this point to be fairly minor.  His books are among the best available on how to spend your money in retirement.

We’re not all the same, and one spending pattern won’t fit all retirees.  Before agreeing to use any planned decline in spending, it’s best to think about the amounts in actual dollar terms to make sure you find it acceptable.


  1. Michael, have you had a chance to read the latest from

    Would love your opinion. He seems quite confident with the 4% withdrawal rate.

    1. Hi Larry,

      Yes, I follow the Blunt Bean Counter and have read his latest article. The 4% withdrawal rate is fine for some people, but not everyone is in the same situation. The biggest personal factors that influence withdrawal rate are

      1) How much longer you might live
      2) You asset allocation
      3) The investment fees you pay
      4) You ability to reduce spending if necessary

      Going to one extreme, consider a retired healthy 40-year old invested entirely in expensive bond funds whose retirement spending just barely covers the essentials, so that he has almost no ability to reduce expenses. In this case a 4% withdrawal rate is way too high.

      Going to another extreme, consider an 85-year old invested 50/50 in stock and bond index ETFs with MERs below 0.2%, whose retirement spending includes a large allocation to discretionary spending. In this case a 4% withdrawal rate is way too low.

      Right now, I'd be OK with a 4% withdrawal rate for a healthy 60-year old invested 70/30 with fees below 0.5% who is prepared to reduce spending by at least 10% if portfolio returns prove to be poor. I don't know exactly how that compares to Michael Kitces opinions, but we have to select a specific type of retiree to properly compare.

    2. Great post as always, thank you Michael.

      The 4% rule I believe comes with the assumption that one must invest with at least 50% equity and in low cost ETFs. Agree that if a retiree is only invested in bonds then 4% would be way too high. It's interesting that the founder of the 4% rule William Bengen recently did an interview and suggested that even 4.5-5% withdrawal rate would be sustainable (https://rationalreminder.ca/podcast/135).

      What he found was that inflation is the main contributing factor when it comes to whether 4% would hold up. Basically, if you encounter double digit inflation in the first 15 years of your retirement the 4% rule would fail. This scenario has never happened before in history but of course doesn't mean it wouldn't happen ever.

      In terms of reduce spending, I believe Michael Kitces' take is that once you pass the 6% withdrawal mark you will need to start reduce spending. He recommends giving up the inflation adjustment as he believes small permanent change is better than big temporary change (e.g. 10-20% spending cut for 1-2 years).

      I personally think that the 4% rule is quite safe especially if you own a house which could serve as a backup plan. But of course everyone's situation is different and spending cuts would be needed for some.

    3. Hi Financial Ramen,

      Because you never mentioned duration of retirement or investment fees, it's hard to comment on your conclusions (although I'm guessing you're thinking of low investment fees). I think a 4% withdrawal rate is too high for any healthy 40-year old no matter how they invest. Of course, anyone who retired somewhere in the first 8 or 9 years of the booming market of the last 12 years will be fine. Who knows what would happen to a young retiree trying to retire today using a 4% starting withdrawal rate.

      If I remember correctly, Bengen's claims about 4.5-5% were for 30-year retirements, which I would say is about right for a 70-year old with a reasonable asset allocation, low investment costs, and some flexibility in reducing spending.

      I'm guessing Kitces must have qualified his take in some way on reducing spending when it gets to 6%. For someone who still has 25 years of retirement to go, 6% is getting high. However, for a 95-year old, 6% is very conservative.

  2. Read all your posts, among the best, thank you! Regarding Spending as we age, I would suggest to anyone planning to outlook same, keep track of your actual spend for a few years (I have 10 categories I track, each with a number of line items). Identify fixed vs. variable costs and review over time. ie. Facilities/Maint which includes Property Taxes, Utilities etc. is for most, fixed and increasing yearly regardless of age. Others such as Entertainment/Vacation is generally variable so make your personal assumptions. A significant percent of expenses are fixed and increasing. Extrapolate your assumptions for each category and you will have a pretty good outlook of your spending over time. There are also outliers to consider, e.g. vehicle purchase, new roof etc. which occur ever few years for most and increasing in cost. In summary, I don't think there is one answer to the question of Aging Spend, but with due diligence each individual can come up with their own answer. Cheers.

    1. Hi Cdnmember,

      These are sensible suggestions. A good starting point for how much you'll spend in the future is to understand how much you're spending in different categories right now.

  3. My understanding of the research is that it assumes spending on expensive hobbies and travel decline as we age. That sounds intuitively correct. But it doesn't account for increased spending on healthcare - which seems like a pretty significant risk not to plan for.

    I found further research by Dr. Bonnie-Jean MacDonald that showed how much healthcare costs for seniors is actually paid for by their children (possibly due to your point of seniors not having the funds to cover increasing costs).

    Her study went on to say how this represents a risk to future retirees since we're having fewer children and they're more likely to live farther from home than in previous generations. It talks about CPP deferral as one strategy to deal with increased costs at advanced ages.

    1. Hi Robb,

      I've read several of the studies and for the most part, they don't conclude much about the reason for spending declines; they mostly just observe that it happens. In a couple of cases, some attempt was made to determine if the declines were voluntary or forced. Results were mixed.

      It has mostly been the reporters of the study results who have offered reasons for spending declines. However, I find them too simplistic. It's obvious that across a huge population there would be a great many reasons why people would spend less as they age. And there would be many different types of spending that they would reduce or even increase.

      For some reason, many of us want to believe that involuntary spending declines due to running short of money is so uncommon that it has no meaningful effect on the data collected for the studies. This flies in the face of personal experience and reason. There are retirees who spend little out of pure choice. These overly frugal retirees may be more common than those who overspent and were forced to spend less. However, both camps exist in the data. I wouldn't want to model my retirement even partially on the mistakes of spendthrifts. This would be like observing that the average adult Canadian owes a few thousand dollars on credit cards, so I should go out and run up my credit card to that level.

      I wasn't aware of evidence of hidden health care costs being borne by adult children. Maybe I should have thought of this; I spent some money myself helping an elderly aunt with home care costs. If she had deferred her CPP to get larger payments, it certainly would have reduced the need for my help.

  4. Hi Michael, here's the study if you're interested: https://www.cia-ica.ca/docs/default-source/research/2020/rp220059e.pdf

    It's not just home care but even things like picking up prescriptions and groceries - it adds up.

    "Currently, about 8 million Canadians are
    unpaid caregivers and, crucially, as of 2012, almost 30 per cent of Canadian caregivers were “sandwich
    generation” women aged 35–44 who were simultaneously raising children and providing care to an older
    member of their family."

    1. Hi Robb,

      I read the report and it seems less like a study than a project kick off (and maybe an appeal for more funding), but it does identify the main problem. Historically, families (and sometimes friends) usually took care of their own elderly. When you have 4 children and a dozen nieces and nephews, odds are that one of them would be willing and able to help you when you're old. This logic no longer applies and those family members willing to help their elderly are becoming overburdened.

      As the work from this study continues, I hope they focus on providing care in a way people want. I find the idea of entering some institution to take care of me terrifying. Will they care about keeping people whose minds still function apart from those who are essentially comatose? Will they care about weeding out abusive workers? I would hope for a model of professional care overseen by one of my sons in the hope that the burden on my sons would be minimal but that they could change my care if they see that I'm unhappy.

  5. Here is a supporting post from Johnathan Clements, regarding the real reasons for declining spending...

    1. Hi Garth,

      I was a little slow approving your message. I'm always happy to get comments on any post, but I get so many spam comments on older posts that I have it set up to require my approval on older ones.

      Jonathan Clements is always worth reading. His claim that spending declines are sometimes forced on retirees seems like it must be true. I'm not sure how often this happens, but it has to be enough to skew the statistics.

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