We recently analyzed the spending patterns of more than 5 million households to evaluate real-world retirement behaviors.
Our research uncovered three surprising patterns: a lifetime spending curve, a retirement spending surge and a high degree of retirement spending volatility.
These new insights indicate helping investors make the most of their retirement assets may require a more dynamic approach to withdrawals than the static rules of the past.
Americans work hard over the course of their careers to save as much as they can to enjoy a financially successful retirement. When they begin to shift from savings to spending, it is critical to help them get the most out of their assets.
A key part of this process is understanding how people tend to spend in retirement. J.P. Morgan’s unique access to the real-world spending patterns of more than 5 million de-identified Chase households has provided new insights on how behaviors can change as people transition into and move through retirement.
For years, conventional wisdom about prudent retirement income1 strategies has typically centered around two much-touted rules of thumb. The first is the 4% rule, which sets a 4% initial withdrawal rate (adjusted annually for inflation) as a “safe” level to provide a steady, sustainable income stream throughout retirement with relatively little risk of premature asset depletion.
The second is that post-retirement income can be broadly modeled using a fixed, reduced benchmark rate relative to someone’s pre-retirement income level. For example, a typical target may be 70% to 80% of a person’s final pre-retirement salary to be able to meet the observed, reduced spending needs of comparable retirees.
Our research into real-life retirement spending patterns, however, uncovered three surprising trends that suggest it may be time to re-examine these popular replacement income strategies. In general, we found that:
There is a lifetime spending curve.
There is a retirement spending surge.
There is notable spending volatility at and through retirement.
Understanding and applying these insights may offer stronger options to optimize withdrawals and help retirees make the most of their assets.
Our research indicated that there is a general curve in median spending that can be observed across a lifetime. EXHIBIT 1 shows the median spending across various age categories in 2016. On average, spending steadily climbed in households between the ages of 20 and 40 and peaked in households in their late 40s and early 50s, after which we observed older households spending less.
Lifestyle spending, median household
EXHIBIT 1: MEDIAN SPENDING—CHASE DATA WITH ESTIMATED CATEGORIZATION OF CHECKS AND CASH
1For the purposes of this paper, the term “retirement income” references the process by which post-retirement spending needs are achieved through the use of investment income, appreciation and/or principal.
2 Farrell, Diana, and Fiona Greig. “Coping with Costs: Big Data on Expense Volatility and Medical Payments.” JPMorgan Chase Institute, 2017.
Forecasts and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
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