In Retirement, You May Not Need to Spend So Much

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If the recent rout in the stock market has you drastically cutting back your retirement spending plans, it probably means that you were counting too much on ever-rising asset prices. But a new research paper suggests that spending less at advanced ages is not necessarily a sign of failure to plan. Even people who plan perfectly do it.

Let’s back up for a minute. The notion that your spending should be consistent over your lifetime is known as consumption smoothing, an economic concept developed by Milton Friedman, Franco Modigliani, Robert Hall and others. The core idea is simple: No amount of luxurious living at age 60 compensates for living in penury at 25 or 85. So you should borrow when you’re young, save and pay off debts during your peak earning years and then spend down your savings in old age. If you do it right, you will enjoy an even standard of living throughout your adult life.

But there’s one obvious difficulty with consumption smoothing, which is that you don’t know how long you’re going to live. A level of consumption that would work perfectly if you live to 85 could leave you destitute if you live an additional 10 years.

“One need hardly be reminded” that your expiration date is in most cases unknowable, Menahem Yaari, an Israeli economist, wrote in an article in The Review of Economic Studies in 1965. Yaari recommended decreasing your consumption level a little bit every year you stay alive. That regular updating strikes a balance between leaving too much money behind if you die young and running out prematurely if you live long.

There’s another reason for consuming less as you get older: Your health is likely declining and some of the expensive objects and activities you enjoyed in youth become less appealing. That’s the focus of the new research, which was conducted by the economists Susann Rohwedder, Michael Hurd and Péter Hudomiet of the RAND Corporation in Santa Monica, Calif.

Americans in their 80s on average feel less financially constrained than Americans in their 50s, which indicates that in most cases the retirees are spending less because they want to, not because they have to, the researchers found. Their findings were based on a 2019 mail survey that’s part of the long-running Health and Retirement Survey, which is conducted by the University of Michigan and funded by the National Institute on Aging and the Social Security Administration.

The composition of retirees’ spending also indicates that most are feeling financially unconstrained. “The key thing that piqued our curiosity is that gifts and donations go up at older ages,” Rohwedder said in an interview. “If people are running out, this is probably an area they would cut back on.”

Yet another sign that the decline in spending is a choice is that it happens even in richer families, the researchers found.

As people age, they report less satisfaction from travel, as well as from new cars, clothes and appliances. The decline is strongest in people who say their health is poor. People who say they’re in excellent health say their enjoyment from travel and leisure is actually greater than it was six years earlier. People in excellent health also report more satisfaction from giving financial support, which goes against the notion that those who expect to live a lot longer are worried about running out of money.

Of course, some people really are up against it. Around 20 percent of respondents age 75 and older say they’re not satisfied with their present financial situation. That’s better than the nearly 45 percent who are unsatisfied from ages 55 to 59, but it’s still a substantial part of the older population.

What does all this mean for people who are watching the stock market with dread? One implication is to take the decline seriously and trim your planned spending a bit rather than betting that stocks will return to their previous growth trajectory. On the plus side, if you’re like most people, you’ll most likely be able to spend slightly less in the future than you’re spending now without feeling pinched.

Elsewhere: Praise for Walmart

Walmart comes across looking good in two new accounts. A book being released in November, “Still Broke: Walmart’s Remarkable Transformation and the Limits of Socially Conscious Capitalism,” by Rick Wartzman, praises the company’s increase in its starting wage, to $12 an hour from $7.25, and improved benefits without completely taking Walmart’s side. And a working paper released this month by the National Bureau of Economic Research concludes that Walmart has not offset its better pay and benefits by reducing the dignity of jobs. The authors of the paper measure dignity by “autonomy on the job, co-worker relationships and the quality of supervision.”

“Just because a Walmart wage is particularly good in places like Louisiana or Mississippi does not mean that other important job attributes (including how workers are treated) are worse there,” one of the authors, Arindrajit Dube of the University of Massachusetts, Amherst, wrote in an email. His co-authors are Suresh Naidu and Adam Reich of Columbia University.

Quote of the Day

“Down the road, it is then possible to visualize a kind of social science that would be very different from the one most of us have been practicing: a moral-social science where moral considerations are not repressed or kept apart, but are systematically commingled with analytic argument, without guilt feelings over any lack of integration; where the transition from preaching to proving and back again is performed frequently and with ease; and where moral considerations need no longer be smuggled in surreptitiously, nor expressed unconsciously, but are displayed openly and disarmingly.”

— Albert O. Hirschman, “Morality and the Social Sciences: A Durable Tension,” 1980 lecture, collected in “The Essential Hirschman” (2013)

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