How You Spend May Impact Your Retirement Plans

When you sit down with a financial advisor to talk about designing your retirement strategy, some things you might typically expect to talk about would be your distribution rate, or how interest rates might impact your decision-making, or stock market valuations and which sectors you might want to consider. But one of the things that could impact your retirement would be the type of retirement spender you are.

About a year ago, JP Morgan Asset Management released a study that looked at retirement spending among a group of over 600,000 US households of people age 55 and older. Using statistical analysis and all kinds of complicated mumbo-jumbo, they were able to group these people into four separate profiles – the Foodies, the Homebodies, the Globetrotters, and the Health Care spenders. And each of these types means different things that may cause you to rethink your current retirement strategy.

Let’s talk about the FOODIES. This group represents the largest percentage of the population, spending on average 28% of their income at retailers in the food and beverage category. They also spend much of their money at big box stores like Target, or online at Amazon. Of all the groups they looked at, these people had the lowest overall total spending. Their housing expenses also tended to be lower, as many have paid off their mortgages and don’t have significant property tax bills. They also tend to spend less as they get older. If this is you, you might benefit from a plan with a U-shaped spending pattern, where you spend more early on in retirement and less as you get older, with a spike in spending toward the end for health care. That may change how you allocate your portfolio today.

Next, we’ve got the HOMEBODIES. While this group showed a lot of variation in spending on housing, on average households in the Homebody category spend 54% of their income on housing expenses – things like utilities, wireless, home repairs, and a bunch of other things (list on graphic). Spending a large share of your total income on housing might be realistic when you’re working, but once that earned income slows down or stops it could be a significant burden. If you find yourself in this category, you might want to bake into your retirement strategy the impact of your mortgage expenses and the cost or benefit of carrying a mortgage… because having a mortgage might not be good for you when you don’t have as much earned income and are in a lower tax bracket. If cash flow is an issue, maybe you consider working toward paying it off – or, maybe you want to think about a reverse mortgage at some point when you’re older. Either way, you should analyze your situation.

The third category is the GLOBETROTTERS. No, not THOSE Globetrotters… We’re talking about the world travelers, those road warriors that represented about 5 percent of the households studied. Of all the household types, this group has the highest overall spending. Chances are, if you’re in this group, you’ve done a very good job of saving over the years. And as travelers, you may find travel costs going up as you age, so you might want to set up a strategy that increases your spending as you get older, with adjustments for inflation every year or two.

Finally, there’s the HEALTH CARE SPENDER. For some retirees, health care expenses take up a significant share of disposable income. On average, this group spends 28% of their income on health care. If you’re in the Health Care Spender group, you should be aware that costs typically increase at rates that are much higher than the rate of inflation. If you’ve ever had even moderate medical expenses over the years, you know what I’m talking about. As such, maybe your plan should increase your income a little bit faster than the rate of inflation to keep you covered.

The real value of working with a financial advisor, one that specializes in retirement, is not necessarily in designing the portfolio or figuring out how your money should be allocated. It’s also in other qualitative aspects, like knowing which type of retirement spender you may be. These things take time, and an ability to adjust your strategy for you, when you need it. That’s what we’re all about. We’re here to help.

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