Reality Retirement Planning: A New Paradigm for an Old Science

Bernicke, Ty
June 2005
Journal of Financial Planning;Jun2005, Vol. 18 Issue 6, p56
Academic Journal
• Traditional retirement planning assumes that a household's expenditures will increase a certain amount each year throughout retirement. Yet data from the U.S. Bureau of Labor's Consumer Expenditure Survey show that household expenditures actually decline as retirees age. Consequently, under traditional retirement planning, consumers tend to oversave for retirement, underspend in their early years of retirement, or postpone retirement. • "Reality" retirement planning assumes that a household's real spending will decrease incrementally throughout retirement. The result is that clients can make more realistic retirement saving assumptions and will be able to retire sooner. • The paper analyzes the Consumer Expenditure Survey data to determine whether people are spending less voluntarily as they age or out of financial necessity or generational differences. The conclusion is that reduced spending is voluntary. • Using Monte Carlo simulation, the paper runs hypothetical retirement income projections comparing traditional retirement planning and reality retirement planning. Under the traditional approach, the couple's nest egg would appear to be depleted by age 80. Under the reality approach, the nest egg at age 80 would be over $2 million. • Such dramatic differences not only have implications for retirement planning, but for related Issues such as estate, tax, and investment planning. INSET: Executive Summary.


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