Editorial Comment: Spending Spree In Retirement?

Among the new retirees I know, the tendency is to downsize from the big house, maybe purchase an RV or some other vacation solution (time share, etc.), and set sites on an “enjoyable lifestyle” comprised of travel, hobbies, social groups, and sometimes part-time work. Some of that is reflected in the above list of expected expenses, but most people focus on doing a few of those things, not all, and certainly not a second home (unless exceptionally well set).

Currently, several of newly retired people whom I know do own two homes. But this is only because they bought the ‘downsizer’ before selling the big house, which they are now unable to sell due to the subprime mortgage mess. This is the kind of reality those numbers are not reflecting. (Note: This may be, in part, because the survey was conducted in April and May of 2007–i.e., before the subprime mess had fully rattled the U.S. economy.)

That’s the heart of the matter: many new retirees, despite their comfortable circumstances at time of retirement, quickly find that they really don’t have as much money for “activities” as they thought they would. Either the big house doesn’t sell, or sells for less than expected, or they encounter unexpected expenses or inflated costs that weren’t factored into the planning. Some find that $250,000 in investable assets doesn’t get them very far. (Some planners are telling me that $1 million in investable assets could be problematic too, “depending…”)

A finding from another study (of 60-74 year olds by Thrivent Financial for Lutherans, Minneapolis) puts the issue in perspective. The researchers in that study found that 56% of fully retired people said they had guessed wrong about how much they would spend each month in retirement. Specifically, 29% said they have been spending more than expected, while–surprisingly–27% have been spending less. (See our summary on this study here).

Clearly, the guestimates about future spending and expenses need to be taken with a grain of salt. Maybe 2 grains.

In a statement about the Sun Life results, David Byrnes, executive vice president and director of sales at the company, surmised that “the old rule of thumb that suggests retirees will need 80% of their pre-retirement income no longer holds true for current and future generations.”

Certainly if the predictions from the Sun Life study prove out, Byrnes will be correct.

But even if the projections don’t pan out, he will be correct. Many advisors tell me that many new retirees need close to 100% of what they earned previously–and many “need” to work at a part-time job to make it happen–just to keep on an even keel. Forget the second home and the international travel, etc. They are talking about having a comfortable retirement, in one home, period.

The Sun Life study tapped into a very fertile issue in the retirement income zone–financial expectations that people have about retirement. It sampled people who are working with “investment professionals” on “investment decisions.” Now, someone with training and experience in retirement income decisions needs to inject some reality into those expectations. This should be someone who knows the ropes, who knows the client, and who knows how to set up a realistic income plan. That someone would be a professional income planning advisor.