Are Clients Saving Too Much for Retirement?

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Conventional wisdom is that retirees spend a fixed amount per year in real terms, meaning that the nominal amount they need rises each year with inflation. But evidence on actual spending behavior suggests that real spending falls with age. If that’s true, people need to save less for retirement than we think.

The standard model of retirement planning may have a key flaw

Financial advisors and their clients are familiar with the traditional upward-sloping chart of nominal spending in retirement:

This chart (figure 1) assumes that retirees’ spending stays constant in real terms and, therefore, nominal spending rises each year in line with inflation. In this example, a prospective retiree expects to spend $50,000 annually in retirement, and her advisor applies a 2% inflation adjustment to estimate future nominal spending.