This research paper from Vanguard came to me in my inbox yesterday.
It is the typical discussion about health costs in retirement. Something you should certainly read, but not anything I want to go into in this email because the paper says something wayyyyyy more important, which should NOT be overlooked.
“Although health care costs increase, spending in virtually all other categories tends to decline with age. BLS data support this conclusion.” (page 14)
Indeed. Welcome aboard Vanguard!
A LONG time ago, in 2005, a guy named Ty Bernicke wrote an article called Reality Retirement Planning in the Journal for Financial Planning.
It was the SEMINAL piece of research I’ve ever read because using Bureau of Labor Statsitcs (BLS) numbers he showed that retirees actually DECREASE their spending in retirement.
Back then this was revolutionary and controversial. Jonathan Clements at the Wall St. Journal ‘challenged’ Bernicke to some degree but not in a convincing way, in my HUMBLE estimation. Unfortunately, I can’t link to the article due to the WSJ paywall.
Ty stood his ground though, agreeing that Clements did have some valid points, but ultimately saying he felt his research was pretty solid.
Turns out Bernicke was right. The idea that most retirees spending is going to increase on a linear trajectory to the Northeast year over year, as ALL planning models show, is just incorrect. Yes, some people WILL spend more in retirement. However, almost 15 years AFTER Bernicke’s piece appeared the evidence, if you will, for actual retiree spending is almost uniformly going in one direction. Vanguard’s piece, VANGUARD OF ALL COMPANIES, confirms this.
I, for one, could not be happier. As I’ve always despised the idea that a couple needs something upwards of 7 figures or more to retire comfortably. Why do “planners” say that? Because their models show it. But what are those models based on??? Remember folks, junk in, junk out. And those models are based on a lot of junk in.
So, instead of telling people they can quit their grinding, soulless job to go volunteer at the local NICU to help orphaned babies, the financial planning industry has been scaring people. “Oh no, Ms. Smith. You should work another 10 years or else you’re going to be eating cat food and will need to move in with your kids.”
That’s bad planning. Horrible actually because Ms. Smith might hate her job and longs to help out the community in other ways that are meaningful to her.
So, remember my friends, as you are contemplating retirement, please, for the love of all that is good, ask your planner, how are you modeling my spending? Are you increasing it with inflation each year? Why?
What’s the basis for this assumption?
Now, lastly, the planner may say “health care” is the reason I’m inflating your income needs. Ummmmm…no. I’ll have other comments on health care costs in retirement but for the time being feel free to watch my video on that here. Just remember housing is by far and away the biggest expense a retiree has. Nothing comes remotely close
At the end of the day, Ty Bernicke is one of the hero’s of financial planning.in my opinion. Not unlike John Bogle, Bill Bengen and the many others who challenged the status quo to benefit the profession and its clients.
I hope he feels vindicated.