The Good News About Retirement

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There is no shortage of bad news about retirement: The population is aging. Workers haven’t saved enough. Market returns will be lower going forward. Inflation is bound to return. Health care is expensive….

Many of you, even those who are relatively well prepared, are concerned about the prospects for your golden years, afraid to make the retirement decision. I have my own share of fears.

Yet, amidst all the dire news, there are rays of hope, good reasons to look on the positive side. Indeed, my own retirement — now more than three years old — has gone better than planned. Our assets are larger now than when we started out, and our life is even a bit more comfortable than expected. Having arrived in our 50’s after our share of hard work and sacrifice, we have unprecedented freedom now to do things exactly as we wish.

I don’t intend to let my guard down. We’re still watching our budget and living carefully in these initial years of early retirement. But it’s encouraging to be ahead of the game, at this point. So let’s explore some of the reasons why we, and you, can afford to be optimistic about retirement….

Happiness Is Independent of Spending

Let’s start with the big news that is old news, to many of us: You can be happy with less. That’s right. You don’t need to own a lot or spend a lot to be happy. Looking back at my own life, I see surprisingly little correlation between money and happiness. From my student days to early marriage, child-rearing, middle age, empty nest, and ultimately financial independence, happiness has been related to many other factors. Spending, after a certain comfort level is reached, is one of the minor variables, in my opinion.

Now this fact is being confirmed in retirement. Surveys of actual experience show that most retirees are happy, even though they are generally living on much less than they did while working. The average replacement rate — the percent of previous income needed once retired — for today’s retirees may be as low as 60%. Not only are work and family-related expenses gone once you retire, but you may be done keeping up with the Joneses too. In one study, 85% of recently-retired households confirmed that they don’t need to spend as much as they did before retirement to be satisfied.

In my experience, people are tempted to spend more on possessions and experiences to ease the pain of jobs and careers that no longer provide meaning in their lives. Transition into semi-retirement, and the need for spending on these surrogate painkillers goes away.

Living on less in retirement, flexibility is required to preserve assets in the face of economic changes. But, rather than perceiving that need as a threat, retirees are accepting and embracing it. One study found that 60% of retirees preferred to reduce their income to adapt to swings in the financial markets rather than continue blindly withdrawing a fixed sum from their portfolios.

Many of us are ready and willing to adapt our lifestyles to economic conditions, so long as our basic necessities are met. Change can be good, and it will probably be inevitable over the course of lengthy modern retirements.

Expenses are Likely to Decline with Age

So you can spend less in retirement than you did while you were working, and still be happy.

But there is more good news: you will probably spend less as retirement progresses, because most people don’t need as much as they age. This is only natural. Early in retirement you’re more likely to be relocating, traveling, spending on luxuries you missed when you were too busy working to enjoy them. Later in retirement you are more likely to be settled in your lifestyle. And, later still, with changing health and energy levels, you are even less likely to be actively consuming. I saw this first-hand in my family. As relatives reached their 80’s, they weren’t out shopping for furnishings or traveling the world. Their lives naturally became simpler, more constrained, more focused at home.

Government figures back up these impressions. The Q2 2013 Consumer Expenditure Survey from the Bureau of Labor Statistics, finds average annual expenditures peaking at about $61,000 for the 45-54 year age range. Then, expenditures fall off steadily with age. Average annual expenditures for those 55-64 years are about $56,000; at 65-74 years they are about $46,000; and at 75 years and older only about $34,000.

A 2012 study from the Employee Benefit Research Institute found a similar pattern. Household expenses declined steadily with age. Using the age 65 expenditure as a benchmark, household expenses fell by 19 percent at age 75, 34 percent at age 85, and 52 percent at age 95.

What does this mean for the average retirement plan, which generally assumes constant annual expenses? As explored in my Constant Retirement Withdrawals: Realistic or Not?, that’s probably not a realistic assumption. And, it isn’t rocket science to realize that, if you’ve planned on a steady level of expenses, but your actual spending tapers off as you age, then you’ll probably wind up with more money than you expected in retirement!

While analyzing previous work on this topic in Advisor Perspectives, retirement researcher Wade Pfau concluded that lower spending needs over time could result in sustainable withdrawal rates that are between 1.3% and 2.4% higher than those required for constant inflation-adjusted spending. In other words, the classic 4% Rule could actually get hiked up by a percent or two. According to Pfau, this might even imply that you could begin your retirement with as much as 25% less wealth.

Am I suggesting that you bank on this analysis and make the retirement leap even sooner, or with less assets than generally recommended? No. There are some technical arguments for why the news might not be quite that good. And then there is a significant caveat regarding health care — the one spending component that generally does not decline with age. The EBRI study showed that, while health care expenses are around 10 percent of the budget for those aged 50–64, they increase to about 20 percent of the budget for those age 85 and older. If health care inflation were to greatly exceed your other expense categories, or you were to have serious health or long-term care needs not covered by insurance, your overall expenses could certainly increase as you age.

Nevertheless, I tend to think, for most of us, that total living expenses will decrease as retirement progresses. But, I would suggest considering this a “bonus” if it materializes in your life, not a required element of your retirement plan in order for your money to last.

Health Care is Available

So the news on your overall spending in retirement is encouraging: It’s likely to decrease, and you’ll probably be perfectly happy. But health care remains a wild card. The expense and availability of health care is certainly among the very top worries of those approaching and entering retirement. I know it figures in the majority of reader survey responses that I receive here. We’re all concerned about the costs, and rightly so.

But, since I started this blog nearly three years ago, there is a new development in the U.S.: Obamacare. Whatever the political and economic prospects for this new government program, the fact remains that many people who could not get coverage before, now qualify, because of the new rules for preexisting conditions. My own retirement in 2011 simply would not have been possible without my wife’s public school teacher health insurance benefits. But, if I were retiring today, I would have a new option. And, as I reported earlier in Shopping Obamacare: Good Deal for Retirees?, it appears to be a viable option, at least in our state. Though we have elected to stay with my wife’s plan for now, since Obamacare is so new and offers no great advantage to us, I suspect I would have happily applied, had health insurance been the missing link in my early retirement.

Aside from the financial concerns, aside from the fact that growing old isn’t easy, aside from the fact that we must navigate an increasingly complex health care system, we’d do well to remind ourselves of our great fortune to live in this era with its many health care options. Most of us can look forward to more productive and more comfortable years, thanks to modern science and technology. They don’t solve all the problems of aging, and I doubt they ever will. But, I can already see how much better off I am than somebody of my age living less than a century ago. Research confirms that “disability-free life expectancy” has been rising, with disability being compressed into the period just before death. We can’t escape our ultimate fate, but the rest of life is generally longer, and better, these days.

Social Security Will Endure

it’s fashionable in some circles to discount Social Security. The bias is so pervasive that younger generations seem to think Social Security will be completely gone by the time they retire. But, when you look at the facts for those nearing retirement now, you see that Social Security will be a key part of retirement for most of us.

It’s true that Social Security is in trouble. My latest Social Security statement tells me that “Without changes, in 2033 the Social Security Trust Fund will be able to pay only about 77 cents for each dollar of scheduled benefits.” That doesn’t sound good.

But it’s highly likely that Social Security will survive in something like its current form. For one thing, note carefully that it is good for almost 20 years even if the politicians do nothing. And they’ll probably figure out a way to kick the can further down the road before then. Given the boomer generation’s experience of two stock market busts in just the last decade, it is almost inconceivable that a majority would support removing the guarantees associated with Social Security. Boomers will be a formidable voting block in their later years, and would surely overrule any attempts to radically change or gut Social Security. Finally, realize the changes needed to fix the program, though politically unpalatable, are relatively modest. Theodore Roszak, in his book Longevity Revolution: As Boomers Become Elders, projects that if the payroll tax were increased just 1 percent each for employees and employers, it would be enough to keep Social Security solvent through the rest of the century.

So Social Security should be around for a couple of decades in precisely its current form, and probably long after that in something like its current form, maybe with somewhat reduced benefits — possibly in the form of older retirement ages or reduced cost of living adjustments. So, in my view, it would be as foolish to ignore Social Security’s potential contribution to your retirement as it would be to rely solely on Social Security payments for your well-being.

Part-Time Work is Available and Rewarding

What if you need even more income in retirement? What if you retire early and need something more to do with your time, or you want to ensure your money will last over a retirement that could conceivably stretch four decades?

The good news is that there is a simple solution: work part-time in retirement. Yes, in the traditional model, people retired after a full career and played golf for the rest of their lives. But we are no longer in a traditional retirement world. Baby boomers expect to live longer, healthier, more active lives. Many of us want to keep contributing in meaningful ways, even when we are no longer part of the full-time work force.

Working part-time in retirement is a potential solution. But working in retirement is different than a full-time career. The commitment, pressure, obligations, and rewards, are all less. And that’s for the better. Ideally a part-time job in retirement will be something new, creative, and meaningful for you. Without the requirement for a full-time paycheck, you can be more generous with your time and effort. You’ll find that people appreciate that. You might even have fun!

And the impact of some modest part-time income on your retirement picture, can be substantial. Using the traditional 4% Rule as a multiplier, if you earn just $1,000 a month, that’s the equivalent of an extra $300,000 in retirement savings. And, it’s a lot easier to find a job that produces $1,000/month, than it is to save $300,000.

While working in retirement is still not the norm, it is on the rise. The Bureau of Labor Statistics reports that the labor force participation rate for seniors nearly doubled from 1990 to 2011. And workers 55 and older logged 42% more part-time hours than they did 10 years previously. Whether this is by necessity or by choice, and how you feel about it, is up to you.

An informal survey I did of motivated retirees a while back indicated that the majority had no difficulty finding enjoyable part-time work in retirement. In many cases, the work found them: Opportunities for extra income are likely to appear as you go about your usual activities. Hobbies, volunteer work, and past professional contacts can all produce interesting leads. Without financial pressure, you can bide your time until the right opportunity appears, then say “yes,” and give it a try.

Note: Resources for over-50 job hunters include the AARP, Senior Job Bank, and Workforce50.

Inheritances May Provide Some Cushion

So Social Security and part-time work can both produce reliable retirement income. There is another source of retirement assets that I would not count on, but that still may well appear in your life….

It’s probably not wise to plan on an inheritance, factoring it into your financial planning in order to cover essential expenses in retirement. (Needing a parent to pass away for your own financial security is unpredictable at best, depressing at worst.) Yet the fact is, many of us will receive inheritances, of some sort.

I think the best approach is to prudently plan for financial independence using only those resources directly under your own control. But don’t work forever to build in an increasingly unnecessary margin of safety. Expect there will be some bad financial news in retirement, along with some good news, and they’ll probably cancel each other out. In the good news category, I include inheritances that will enhance your security if they materialize, but won’t detract from your lifestyle if they don’t.

There are statistics for the “average” inheritances that baby boomers will receive. But this is one area where statistics seem more useless than usual. Estate details are going to depend on your exact family situation and on how family members beyond your control have lived their lives. While there may be rare circumstances where you can plan on when and what you will receive, in the vast majority of situations I think it’s best to plan on receiving nothing. You can then be pleasantly surprised if and when an inheritance shows up.

A Win-Win Situation

The bottom line, in my opinion, is that those who have lived prudently and made a reasonable effort to save, are likely to be pleasantly surprised by most of the realities of retirement:

You’ll probably find, even if you need to spend less, that there is no corresponding decline in happiness. In fact, you might be happier. As you age, your expenses will naturally decrease, removing some financial pressure. Modern health care has the potential to deliver more active and more comfortable years nearer to the end of life. Social Security will likely endure and continue to provide significant income. And, if that’s not enough, or you need some meaningful activity, part-time work is likely to be available. Eventually, some amount of inheritance may show up, though we’d be wise not to count on it.

Finally, we can enjoy this good news in retirement for longer: Thanks to modern science, health care, and technology, life expectancy in the U.S. has been rising steadily for decades.

Of course, from a financial planning standpoint that longer life expectancy represents “longevity risk.”

But, not to worry. You’re either going to live longer and have more life to enjoy, or you’re going to die sooner and sidestep those pesky longevity-related financial issues.

It’s a win-win situation. What’s not to like?


  1. Howard M Hohnsen says

    Hi Darrow, thanks for being a voice of reason in the increasing cacophony of advice, complaints, and discussions on retirement. Living below one’s means, saving and investing regularly, and hopefully avoiding long term unemployment and serious health issues, seems to give one the best chance for a good retirement. Keep the articles coming, I enjoy them very much. Howard

  2. Chuck Yanus says

    Good article. People need to see a more positive spin on retirement itself from a financial standpoint. And while some may use such articles as reinforcement to procrastinate, the majority will get the feeling that maybe, just maybe. they can make this retirement thing work.

    Hit the retirement button myself in March. I enjoy very much not having to fly weekly, be on endless/useless concalls virtually every day, and worrying and fretting about goals. At 60 my wife and I are doing well and are able to do what we want, when we want. Life is good.

    Keep up the great work, Darrow.

    • Thanks Chuck. I think it’s helpful to look on the bright side. Sounds like you’ve created the foundation for a successful retirement. Congrats on your start in March, and best wishes for the coming years!

  3. Another fine article, but one that I fear ignores the elephant in the room for those of us with a lifetime of savings.

    I speak of high inflation.

    The national debt can’t be ignored (though that’s our strategy so far). Ultimately it will have to be addressed.

    It won’t happen through reducing benefits. That will bring fire to the streets.

    It won’t happen through increased taxes. That will bring the economy to a halt (as well as vote out the knuckleheads who voted for them).

    It won’t happen through default. Too many of the lenders to our government are our own citizens.

    So what’s left, as I see it, is intentional inflation. Paying back the debt with cheap dollars.

    It’s said the best way to protect oneself against inflation is by being invested in the stock market. But that doesn’t work so well for those of us in retirement years.

    I wish I could see a way around this, but haven’t so far. Hope someone has some good advice.

    • Thanks Steve. Valid concerns, to be sure. I do agree with you about intentional inflation. I won’t tackle the entire subject here, but I believe that owning a diversity of assets (other than debt instruments or dollars, but not limited to U.S. stocks), is a workable defense. Retirees are being forced to a different asset allocation, but it still may be possible to preserve wealth.

      • There are mutual funds and exchange-traded funds that invest in securities of other countries, (I believe) in foreign currencies, and in gold and silver. Such funds may provide some diversification.

        • Steve, you said “There are mutual funds and exchange-traded funds that invest in securities of other countries, (I believe) in foreign currencies, and in gold and silver. Such funds may provide some diversification.”

          It might help, but it would be pissing on the burning embers of your house.

          I doubt you’d want to put more than ten percent of your portfolio, if that, in foreign currencies or precious metals.

          What about the other 90%, and what about foreign currencies staying valuable when the one they’re all benchmarked against (ie, the dollar) goes belly up?

          Darrow, I’m looking forward to your input on this question: how do those of us who have saved for our retirement ensure our savings will actually be able to buy anything in the coming decades?


          • This topic probably deserves an article of its own. But, for starters, we should understand that inflation is a specific monetary process. Inflation means that the value of a specific currency is decreasing relative to goods and services. The answer is to minimize your holdings in that currency, spreading it around to the goods and services themselves (businesses, possibly represented by the stock market), and other currencies — foreign and precious metals in modest amounts are options. If the value of the dollar goes down, it is very likely that the value of other currencies will go up.

            There may be broader systemic threats out there, but I’m unsure how well we can really prepare for those. (See my article: Y2K and Black Swans.) But inflation/deflation are known economic scenarios: we can prepare for them by holding asset classes that have performed well under those conditions. Harry Browne (Fail-Safe Investing: Lifelong Financial Security in 30 Minutes) is also a source of inspiration on this subject.

          • Steve K – I would recommend you read some books by Larry Swedroe, who is one of the few money managers to apply academic portfolio theory to advising clients. The evidence seems to support that ALMOST ALL investors can reduce the risk of their portfolio by investing in foreign equities. I recall that this effect continues even if the amount of the investment approaches 25%. I personally don’t invest that much in foreign equities, but I try to keep 10%-15% in foreign equity ETFs. Right now, they have the benefit of producing some decent dividends as well.

            That is different than direct investment in foreign currency, but does provide a hedge against weakening of the dollar, in addition to reducing correlation to us domestic equities.

          • Thanks Phil. Foreign equities are a diversification I definitely subscribe to. For what it’s worth, about 33% of my equities are international.

  4. Ingrid Polkinghorne says

    Good information as expected from you. Thanks for helping those of us still struggling to make sure we don’t run out of money in retirement.

  5. It also looks like there is a trend toward providing health care at home for elders, in which case, we can look forward to having an easier time in our old age rather than be constantly sent to the hospital for health problems. I’m looking forward to robot-helpers, myself!

  6. Hello, Darrow. Your article is very informative. I am not worried, as I am in reasonably good shape now and will be in excellent shape once I reach age 70, which I will reach in less than 11 1/2 years from now. I am reasonably sure that the politicians will not tamper with Social Security. Otherwise, we Boomers will vote these people out of office at the voting booths every two years (for the United States House of Representatives), every four years (for the President), or six years (for the United States Senate). I would think that even the Republican politicians would be afraid of what we Boomers could do to their political survival on election days.

    With regard to health care, even with health insurance and good quality care, it is up to each of us to take care of ourselves. I, myself, get a lot of exercise, have a good diet, and (for goodness sakes!) stay away from tobacco products. Unfortunately, I see a lot of people who have poor health habits, especially overeating, which often leads to obesity. Also, there are too many cigarette smokers, even in California, where the anti-smoking laws are strict. Both of my parents were cigarette smokers. (My parents started smoking in the early 1940’s.) My Mom passed away from the direct effects of cigarette smoking in 2000. Cigarette smoking contributed to my Dad’s passing in 2002. I also had other people in my life who passed away from the effects of cigarette smoking and smoking other tobacco products. Fortunately, I stayed away from my parents when they smoked cigarettes. My lungs and heart are in excellent shape.

    To deal with inflation, asset allocation is important. Keep in mind, at least for those of us who own our residences, most mortgages are fixed-rate loans. Also, mortgages eventually can be paid off. Once we purchase our homes, the purchase price is fixed. Although health care is not cheap, housing still probably is our largest expense. Keeping housing costs under control still is very important. People also can help keep their health care costs under control by engaging in healthy habits, which, in addition to the healthy habits I mentioned above, include staying indoors on hot summer days, such as today, when the sun is out. There is a higher incidence of heat stroke and sunburn when the sun is out and it is hot outside.

  7. Fred Westenfeld says

    I just love your common sense, reasonable, no fluff approach. So refreshing, easy to comprehend, and much appreciated!

  8. Thanks Darrow. It’s so good to be reminded of these things, that no matter what happens there is good to be seen and hope to be had. I’ve passed through some pretty intense trials and looking back on it, they really weren’t “that” bad. I love the question, “what’s the worst that could happen?” coupled with the answer of “it’s not the end of the world”. Your thoughts in this post bring things into perspective. To your success!

  9. Thanks for another reality-grounded post, Darrow. Just by coincidence, the same day I read your piece, I also read the results of a new survey conducted by T. Rowe Price comparing pre-retirees’ concerns about the future with the lifestyle realities of those recently retired. It aligns quite well with what you’re saying–the early retirees reflect more optimism and sense of well-being about their situation in life than the older workers who are worried about financial security. Interestingly, the survey suggests that a significant portion of the retirees surveyed follow a dynamic asset withdrawal strategy (as you’ve described in previous posts) rather than a rigid 4 percent drawdown. From the report: “About nine of 10 adjust their lifestyles to fit their income, and almost as many say they don’t need to spend as much as when they were working to be satisfied.” Anyone interested in the report can find it through the TRP homepage (, in the “Insights” subcategory.

  10. I enjoyed your article as usual. I was curious how you look at replacement income. If for example: you made $100K at your job and you brought home only $40K after taxes, contributions, dues, etc. And, when you retire you can bring home $40K from any source of non-work income (dividends, rentals, etc.) – would you consider this to be 40% replacement of your previous income? There is always talk about replacement % of salary income, but as we all know that there will be no more payroll taxes, deferred compensation contributions, etc. when retired. This is just a rough example for illustration purposes, but I was wondering how you would look at this. As this example shows, you can have a much higher income than what you acually bring home and live on.

    • Thanks Tina. Following the link in my article, and from there to the relevant research in the Social Security Bulletin, we soon discover that “replacement rate” has many possible definitions! A simple definition, for our purposes, would be the ratio of your gross retirement income from all sources to your final gross pre-retirement income. So, if you made $100K in your last working year, and your Social Security/pension/investment income in retirement was $50K, then your replacement rate would be 50%. As long as we’re clear about how we’re defining the term, the most important point is that there are a lot of expenses during the working years that will be lower or non-existent in retirement: mortgage interest, child-rearing, commuting, education, retirement contributions, taxes, and so on. And that’s just one reason it may be easier to be happy in retirement!