You'll Spend Less As You Age

Choppy markets and rising health care costs needn't stop you from having the money for the retirement you want. We asked five of the brightest minds in retirement planning for their big ideas to help you cruise through the obstacles.

Below, advice from our second expert, Morningstar researcher David Blanchett.

Big idea: You might not need to spend as much as you think

The markets will determine how much you can safely withdraw in retirement. But now turn to a far more personal question: How much money will you actually need?

David Blanchett, head of retirement research at Morningstar Investment Management in Chicago, says that if you use the usual assumptions to answer that question, you may end up setting a far too daunting savings goal.

Many planners and online calculators assume you'll need 70% to 80% of your pre-retirement income to have a satisfying life after work. "Those shortcuts can overestimate the true cost of retirement for many people by as much as 20%," says Blanchett.

Using Bureau of Labor Statistics data on retiree spending patterns, Blanchett has found that the amount you will need hinges in large part on how much you earn during your career. Counterintuitively, those who earn more usually have to replace less of their income after they leave the office.

It makes sense when you think about the costs you often bear while you are working: You max out your 401(k), pony up for the kids' college education, and finish paying down the mortgage. You buy professional clothes for work and eat out not only as a special treat but also to save time. Higher earners also pay more in income, Social Security, and Medicare taxes.

Those costs fall after retirement, and the more you've been making, the steeper the drop can be. "The household that makes $40,000 a year might have an 85% replacement rate, and the household making $100,000 a year might need 60%," says Blanchett.

Planner Jonathan Guyton, a columnist for the Journal of Financial Planning, says Blanchett's work "points to some significant flaws in widely touted methods people use to figure out what they need in retirement."

Further, Blanchett challenges the assumption that your spending needs to rise in lockstep with inflation. When Blanchett looked at actual spending, he found it declined, after adjusting for inflation, through most of retirement. High health care costs become a factor in later years, but even then, real spending was lower overall than it was at the start.

Of course, some spend too much in the early years and then are forced to tighten their belt, says Linda Leitz, a planner in Colorado Springs. However, Blanchett does find that even people with enough to support their spending seem to reduce their costs. Leitz sees that too.

"Some people want to slow down or shift more time to lower-cost activities, like being with their grandchildren," she says. Again, higher earners seem to reduce more. They're the most likely to spend on the big-ticket dreams like travel -- activities that tend to drop off with age -- and they're the ones with discretionary income they can adjust downward later.

Why not aim for that 80% and give yourself a margin of error? That's fine if you have time to save more. Later on, overestimating your needs can hurt if it means depriving yourself. "You may have regrets about how you spent the early years of your retirement," says Blanchett. Or you might reach for higher returns and take too much risk.

MAKE THE RIGHT MOVES

Get specific. Blanchett recommends you do precise calculations as you zero in on your sixties. Will you still have a mortgage? Do you want to downsize? Plan to help your children financially? The retirement budget worksheets in the Retirement Income Planner at Fidelity.com can help you nail down the particulars.

Focus on what's fixed. Once you've laid out those costs, figure out which are likely to persist and which are flexible (say, your clothing budget) or one-time splashes (that big trip). If less of your budget is fixed, you may be able to spend more at the start.

Some kids dream of being baseball players or rock stars. And then there's David Blanchett. The son of a math and a science teacher, Blanchett says he was always drawn to numbers and developed a passion for investing in his teens. He interned at Merrill Lynch in high school and passed the certified financial planning exam before he graduated from college. A University of Chicago MBA, he's now working on finishing up a Ph.D. at Texas Tech.

Click below to see more big ideas from some of the retirement-planning world's sharpest minds:

Forget the 4% withdrawal rule: Wade Pfau, professor of retirement income, American College

Plan to pay for future health costs: Carolyn McClanahan, president, Life Planning Partners

Plan for the critical first decade: Michael Kitces, partner and director of research, Pinnacle Advisory

Social Security is the best deal: Alicia Munnell, professor of management, Boston College