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Are retirement needs overstated?

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The model used by many financial planners for retirement planning doesn’t accurately reflect how retirees spend during their early and middle retirement years, which means advisors might be overestimating how much their clients will need to save for retirement.

That’s according to the research of David M. Blanchett, head of retirement research for the Morningstar Investment Management Group. And although the headlines have been screaming for years that people aren’t saving enough for retirement, much less being told that their targets are too high, he’s receiving an award for his work.

Blanchett will be one of the recipients of the Financial Planning Association’s 2015 Montgomery-Warschauer Award in September for his article “Exploring the Retirement Consumption Puzzle,” which appeared in the FPA’s Journal of Financial Planning in May of 2014. The award is presented to the authors of articles appearing in the Journal the previous year that provided the most outstanding contribution to the betterment of the profession.

According to Blanchett’s article, “retiree expenditures tend to decrease both upon and during retirement. This decrease in spending is inconsistent with general economic theories on consumption, which suggest individuals seek to maintain constant consumption over their lifetimes.”

In addition, while analysis suggests that “although the retiree consumption basket is likely to increase at a rate that is faster than general inflation, actual retiree spending tends to decline in retirement in real terms. This decrease in real consumption averages approximately 1 percent per year during retirement.”

The Journal’s editorial advisory board said that his article “is thought-provoking because of how it questions the assumptions financial planners make” and “addresses a potential weakness in assumptions planners use.”

Blanchett’s article proposes that, taking into account the decrease in spending during a retiree’s middle years, compared with increasing during later years when medical expenses are likely on the rise, advisors might be able to better plot potential retirement spending in a way that would allow retirees to spend more earlier in their retirement to avoid what he terms “suboptimal retirement consumption.”

He continues: “Retirees may be better served by planning on spending more early in retirement (and saving more for later in retirement) than assuming some constant inflation-adjusted amount. Spending more early in retirement also allows retirees the ability to spend money on things they may be unable to enjoy later in retirement as health declines.”


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