See more of the story

When it comes to how much money retirees can safely withdraw from retirement savings each year, the standard assumption is you should plan on spending the same amount annually. ("Safely" means the risk of running out of savings late in life is minimal.) The best-known guide is retirees can withdraw 4% in the first year of retirement from their savings and in subsequent years 4% plus an adjustment for inflation. Recent research suggests 4% may be too optimistic and retirees should consider lowering their withdrawals to the 3% range. Yet the idea remains the same: Plan on withdrawing the same amount year after year, essentially a "retirement paycheck".

The idea is attractively simple. There is a flaw in this roadmap, however. Data show that spending adjusted for inflation declines throughout the retirement (with an increase late in life driven by higher health care spending.) Retirees spend more in the early years when they're typically healthier and in their later years cut back on consumption.

The key question is whether the spending differences over time reflect choice or financial constraints. I recently attended an online talk given by Rand Corp. economist Susann Rohwedder on her co-authored paper, "Explanations for the Decline in Spending at Older Ages." Rohwedder and her co-authors investigated what might account for the spending drop for single households and married persons. Among their tests were tapping into surveyed perceptions of spending changes on a variety of items over the last six years (ending in 2019). For example, buying a new car and purchasing new appliances like a television brought less satisfaction to those 75 and older compared to six years ago.

The key conclusion is that for a majority of those surveyed, the decline in spending on travel, leisure, eating out and other activities largely reflected a "been there, done that" perspective. They "had less need to spend at older ages," says Rohwedder.

One implication of studies like this is that steady inflation-adjusted spending rules like 4 or 3% are probably too conservative for many retirees, at least in the early years. Near-retirees might want to tweak their plans to take into account that they'll want to spend earlier in retirement, and they'll probably pull back later on. The data on spending suggest many near-retirees with retirement savings plans are better prepared financially for their elder years than they think since expenses tend to decline throughout retirement.

Chris Farrell is senior economics contributor, "Marketplace," and Minnesota Public Radio.