More and more research on retirement continues to reveal a hidden question that could make all the difference in your retirement lifestyle:  "Exactly how much is it that you're planning on spending?"

Most, if not all the writings on retirement, whether informal in the media or formal as in academic research, begin from the premise that your spending in retirement will be somewhere near a percentage of pre-retirement earnings. And the story goes that you can use some broad assumptions about what that spending rate will be, but most conclude it's likely somewhere between 70%-80% of pre-retirement income.

But the backstory seems to be that the 70%-80% number leaves an awful lot of grey area. 

And why is that?  Because spending is unique to each household and each retiree. Needs, wants and desires all tend to change depending on the person or people that we're talking about and at what point along the retirement transom we're talking about as well. 

Hence, the need for a more comprehensive method of planning "to and through" retirement as it relates to spending. 

That comprehensive method involves modeling cash flow throughout your expected retirement lifecycle. 

It's true; projecting cash flow over a 30 to 40 year period is fraught with it's own perils if you will, but most, if not all of those can be adroitly managed. How you ask? Simple, update your estimates every year, or every other year at the least.  In reality, your use of a 70%-80% number isn't more accurate over an extended time frame than an actual "budget" is, is it?  Think of it this way, if your original goal was 70% of pre-retirement income as a spending target and your costs for one of two items, vacations or health care costs increased you to 77% of pre-retirement spending, are those two scenarios equal?

Hardly.  Discretionary spending on items like vacations will always be easier to manage than non-discretionary spending on something as important as health care. So while the quick answer may be to go with a percentage of pre-retirement spending, reality is that it doesn't stand the test of time. 

So, you could break your simplified single percentage down couldn't you? You could say, "it's 75% and let's assume that 25% of that is taxes, 25% is discretionary spending and 25% is non-discretionary spending."  And, when the next wild card shows up (a sick spouse, a child's wedding, a grandchild's college tuitions, a new car, increased insurance costs) you're going to keep fine tuning and adjusting until you wind up with a budget anyway so why not just start there?

The key to all this really is the updating regularly part, not the projecting cash flow part.  The problem with regular comprehensive updates lies in part with the financial services industry and with the nature of people themselves;

  • Most of the financial people that you'll meet are more concerned with their agenda than yours. I'd venture to say that most financial plans are written to sell products, not appropriately address issues around planning, so regular updates aren't going to happen or at least they're not going to be driven by the planner (Unless there's more product to sell.) and; 
  • Most people would rather not know specifically where the problems are, what the solutions are or where changes need to be made. If ignorance is bliss, American retirees are among the happiest people on earth; at least when it comes to retirement spending. 

In essence, retirees don't want to keep revisiting an issue that advisors largely don't want to keep revisiting either. That combination is keeping retirement from being all it could be. 

That doesn't mean that all advisors don't want to revisit the issue in regular increments or that all Client's don't.  My bet would be that these are the Client's with the best chance of a retirement standard of living closest to what they had envisioned. Keeping score remains an important part of the contest and well, you can't keep score without the numbers.