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How does spending change over the course of your life and why it might mean you could spend more in retirement? That and much more on this Saturday personal finance edition of Motley fool money, I'm Robert Brockham, and this week I speak with financial planning expert David Blanchett about his research into how to turn a portfolio into a retirement paycheck and why many retirees could spend more than they do. But first, let's dig into what happened last week in money, starting with the ongoing federal government shutdown. One consequence is that many economic numbers won't be released, including the previous week's jobs report and, if the shutdown continues, the inflation figures for September, the cost of living adjusted for Social Security, the retirement account contribution limits for 2026 and the new rate for Series I savings bonds, also known as I bonds. Another consequence is that many federal employees are furloughed, including nearly half of the workforce at the IRS. But no, that doesn't mean you could ignore the October 15 deadline to get your 2024 tax return in if you filed for an extension. And also, several government websites are down. So, for example, if you're the victim of identity theft, you'll have to wait until the shutdown is over to report the crime and get helpful resources@identitytheft.gov while the past is no guarantee of future results, Jeff Bookbinder of LPL did publish some stats about what happened during the past shutdowns. So since 1976, there have been 21 shutdowns, and they last on average eight days. But the longest was the last one, which was during the first Trump presidency, and lasted 34 days on average. The stock market is essentially flat during a shutdown, with a little bit of variability, the biggest decline being more than 4% in 1979 and the biggest gain being around 10% again during the last shutdown, which began in 2018 2018. The treasury market still operates, since it's considered an essential service, so interest will be paid and auctions will continue. Which is good because our government pretty much runs on debt. And speaking of identity theft, for our next item we turn to a recent article from New York Times columnist Tara Siegel Bernard, who wrote about a reader who logged into his wife's IRA at Vanguard and found that $120,000 worth of investments was missing. It turns out that scammers opened up an IRA in his wife's name at Merrill lynch, then requested the investments be rolled over via the Automated Customer Account Transfer Service, Otherwise known as ACATs, which is the system that firms use to move money and investments among one another. Fortunately, this reader discovered the crime soon enough and the investments were returned in a week. Unfortunately, this type of ACATS fraud is on the rise. The truth is, it often doesn't take very much to open a new account online. It doesn't require a credit check, and freezing your credit won't prevent it. To request a transfer from another account, the scammer has to know enough information about the person and the account that holds the investments, which can be done maybe during a security breach or grabbing a statement out of the mailbox or the garbage. The transferring firm may or may not send a notification that there's been a request for a transfer, and even if they do, account holders don't always read it, given how much email and snail mail we all get. So what should you do? According to Siegel Bernard, ask your financial provider what sort of notifications they send if money was transferred out. Make sure the alerts are turned on, and ask the firm if they have a locking feature to prevent this type of activity if they don't demand one. Also, always use two factor authentication, guard your brokerage account numbers and shred paper statements if you absolutely insist on receiving them that way. Practice good email hygiene too. And if you receive paper mail from a financial institution that you suspect is just a solicitation, open it anyway. It might be alerting you that an account was opened in your name, end of quote. And now we move on to the number of the week, which is 60%. That's the percentage of items in the Consumer Price Index that saw annualized month over month growth rates above 3%. According to Torsten Slok of Apollo, that figure was just 35% a year ago. The last time we saw this type of increase in the percentage of items experiencing price jumps above 3% was 2021, as inflation began its climb to above 9% in 2022. Up next, how spending changes in and throughout retirement and what that means for how much you have to save for retirement when Motley Fool MONEY continues Trading.
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Your financial well being depends. First and foremost on your income, how much of it you spend and how much is left over to invest. Here to discuss how income and spending change over time and what it means for your retirement and is David Blanchett, Managing director, portfolio manager and head of retirement research for PGM DC Solutions. David, welcome back to Motley Fool Money.
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Great to be here.
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So let's start with how income and spending changes over someone's career while they're still working.
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Sure. So if we think about how income changes, right, you know, and it's obviously very different for everyone, what tends to happen, right, is when you're young, you make less, as you move into your 50s and late 50s, you make more and then earnings tend to trail off, right? So what we typically see, right, is this, is this pretty significant income growth while you're working. And why that's really important to point out is that for a lot of Americans, they're actually under saving if they increase their spending along with their raises over time, right? So say you're in your 40s, you're making $100,000 a year and you're saving 10%, that's great, okay? But then if, if by, in your 50s, you're making twice that. What we often see is people fall kind of further and further behind. I had a clever piece I wrote a few years ago talking about more money, more problems, which is just that it's important to be aware that if your income rises dramatically as you approach retirement and your spending adjusts accordingly, that could have a detrimental effect on your retirement readiness. 1 think about, there's spending, there's income now in retirement, we can focus more on spending and we don't tend to see large changes in spending when someone moves from work to retired. I've done a bunch this different ways and it goes Maybe down about 5% on average, right? So there's kind of common rules of thumb. People throw out like the like 70% and so like to be really clear about like the 70% rule, whatever we call it, like that, that's, that's a ballpark for your pre tax income and what your after tax retirement goal is going to be. So two very different numbers, right? The pre tax income is you make $100,000 a year after you net out how much you're saving for retirement taxes, all these things, your goal would be about $70,000. Okay? So let's just assume that is your. Now the most common assumption in financial plans is that $70,000 a year or whatever the number is, would increase annually by inflation for the duration of retirement. In reality, it doesn't tend to do that. We tend to see increases in spending to be 1 or 2% less than inflation. So if inflation average is say 3% a year, you only might spend about 1 1/2% more per year. And where that's really, really important is if you kind of grow that out over a 20 or 30 year time horizon where the actual amount you're going to be spending could decline significantly in today's dollars.
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Let me hit on one of the things you mentioned previously because I've recommended that report More money, more problems many times. And the point you're making there is if you're saving 10% of your income and you get a raise, you'll obviously be saving more because you're getting 10% of a bigger income. But you need to also be increasing your savings rate because otherwise you're increasing the cost of your lifestyle. Everyone wants to maintain their lifestyle in retirement. But if you're just spending most of your raise, you're basically increasing how much you need to save for retirement, right?
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And how much you should have saved, you know, 20 or 30 years ago because like most of us are saving. Thinking about how much I spend today, right? I spend $100,000 today. The problem is, is if you're like spending like 250k in 15 years, you weren't saving enough or you should have been saving like 3x what you were saving for that goal. And so that's, that's kind of this problem. And so I think that like there are some good rules of thumb that you can use like try to save like a third of your raise to kind of help yourself catch up and then spend the rest. I wouldn't say, hey, don't spend any of your raise, but just be aware of the implications that could have on your retirement situation if all of a sudden you're spending a lot more than you've been saving for in the past.
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All right, so let's get to the other point you made about retirement. And I think that the base assumption for many people, whether you're talking to a retirement expert or financial plan, whether you're using a calculator or even yield 4% rule, which we may touch on a little later, is that a retiree will need to increase their spending every year in retirement, you're saying that that is not true. Why is that? Is that by choice or is it by necessity?
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So, you know, I actually published some research on this effect about a decade ago, and I'm going to Release a new piece of research on this effect again, probably early next year. And the results are like identical. So much larger data set, much bigger analysis. Right. But like, you know, long story short, the evidence is very clear that the majority of retirees do not increase their spending every year lockstep with inflation. And in the new piece I have all these controls where I look at who is underfunded, who is overfunded. And I think there is definitely a component of this, which is circumstances. Some people have to cut back, they know they have to cut back. So I mentioned a minute ago that people when they retire spend about 5% less. There is a slight reduction in spending, but you might have to spend a ton less because you are way underfunded. And so I think part of it is this fact that people have to spend less because they haven't saved enough. But if you isolate and look at just households who could spend more, many of them don't, especially as they get older. I think to me, the key here is that when you run these financial projections, considering the possibility or the likelihood of reduced spending can be really important because it can free up money earlier in retirement when you can actually enjoy it.
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Right.
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Like there's a really fun kind of model, the slow go, the go go, the slow go and the no go years. Right. And I think where that's really neat is just that like, younger retirees can typically be a lot more active than older retirees. Right. That's just the nature of things. And so what I want someone to be able to do is not like underspin like crazy when they're in their 60s and 70s, then have this massive pot of money left in their 80s and they can no longer travel or enjoy it. And so I think that, that you know, when you're thinking about, you know, how much can I spend each year, like what is my retirement readiness? Maybe run a projection where you only increase spending by like 2% less than inflation. What that'll do probably is free up a lot more money for you earlier in retirement.
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Can we look at it another way in that maybe it means someone doesn't have to save as much to retire. Does that mean some people may be able to retire a little sooner?
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It does. I mean, you need about 25ish percent less, right, when you retire. Because what's really a really neat thing here is, right, like Social Security retirement benefits. I know that there's like a hot mess with a trust fund. Let's ignore that for now, right? Like they are indexed by the full cpi. Right. And so what happens here is like your savings, if we just assume you get your raises with Social Security, then the role of your portfolio changes dramatically.
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Right.
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The portfolio now has to maintain a constant nominal amount of income potentially versus one that increases by inflation. And that can make it where you're going to have a much lower level of savings when you first retire. So to your point, you can retire earlier, you can spend more. And the key here is the rule is you will spend less. The exception is you will spend more. So I just think that people. This is a very common phenomena that is not often incorporated in financial plans.
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Do you have an idea why that is? I mean your research is pretty well known about this, but from what I can tell, it's not incorporated into the broader financial planning industry. Or am I wrong? Our financial planner is starting to factor this in.
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I mean I still even do write papers where I assume it increases by inflation because everyone expects that. Right. But I think the problem is that just not an economic reality. I think where you often get some pushback is that advisors have said to me, well I know that but I like to be conservative for things like healthcare expense later in retirement. And I think there's reasons why. But I think that to really do it well, to be honest, I think it's like a second financial plan, like okay, okay do your first one where it increases by inflation because lots can happen. But I think that this is where the nuance of a second plan to steal like what if we change this assumption? How would it change how you spend? That's where it's really valuable. So maybe, maybe not as the primary plan, I think maybe it should be, but as a secondary plan I think it's a no brainer especially for kind of an at retirement person to get a better idea of what is a reasonable target for spending.
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A few weeks ago we had Bill Bengan on the show. Bengan being the father of the 4% rule which he says is now 4.7%. Actually in the interview he said maybe 5.5% nowadays. And you know, that way of determining how much someone can spend in retirement. As soon as first of all retirement will last 30 years, retiree spends the same inflation adjusted about every year in retirement, which as we talked about isn't necessarily what will happen. It doesn't assume that people change their spending based on what's going on with their portfolio. So some assumptions there that are perhaps not reflective of real life. So given the reality of retirement spending and the uncertainty of how long it will Last basically how long we're going to live. What do you think is the best way to determine how much a retiree could spend each year in retirement?
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I built some pretty complex stochastic or Monte Carlo models. There's all these kind of like, weird levers you pull when you build models that show adaptive withdrawals and use better outcomes metrics and all this stuff. And so what I've said for a long time, though, is that 5% is a much better starting place than 4%. I think Bill is now there too, right? Because in reality, people have flexibility about spending. Everyone has a base of guaranteed lifetime income. It's like, what is the marginal effect of having to make it? There's all these different things. But I do think that that 5 or even 6% is probably a reasonable starting point for most Americans. Now, here's the thing. If you take out 6% in year one and then you go back and kind of readjust that over time, it's possible you might have to cut back. Okay? But I think most Americans are going to be okay with that because when you get older, we can make choices. We can say, I'm not going to go to Florida, I'm going to go to Dollywood. I mean, whatever you can pick based upon where you live, what you're going to do. But I think the problem with a lot of models is that they don't acknowledge that adaptability and the more adaptive you are, the more you can take out and enjoy early retirement. I do think that 4% is probably way too conservative. I think 5% is probably close to the floor, but for most Americans, it's going to be higher again based upon how much guaranteed lifetime income do you have, how flexible you are, things like that.
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You talked about the ability to cut back when maybe the portfolio's down or something like that. And you've recently written about segmenting your retiree budget by essential expenses and discretionary expenses. And I think that helps people think about, okay, I do have this wiggle room in terms of if something happens, this is where I cut back. And you've also written about the benefit of having a certain amount of guaranteed income to at least cover the essential expenses.
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I think every American, ish. Should have all of their essential expenses covered with lifetime income. Right? And the best place to get that is Social Security. Again, let's ignore, like, the trust fund madness going on today. But, like, there's two key reasons here, okay? You know, one is just the economic benefits of risk pooling any kind of serious retirement, academic who has thought about retirement has probably acknowledged to some extent that the movement to 401s and 403bs is really structurally inefficient. We all have to worry about how long we're going to live in the markets, and that's just not a good way to design strategies given all the uncertainties. But to me, there's this behavioral angle of if I know that no matter how long I live, it changes your relationship with your savings. Right. People have said, david, I've got millions of dollars of savings. There's no way I'm going to go broke. I would say, okay, cool. Like, well, why aren't you spending down your money? What's holding you back? And I think what I have found talking to advisors, retirees, et cetera, is that when you know that no matter how long you're going to live, you're going to be okay, it changes the relationship with your savings. It might make you more willing to do things in other ways. So I would say, even like Bill Gates, you'll pick anybody. You know, like, if you have your essential expenses covered, it's going to change how you perceive using the rest of what you got in terms of enjoying your retirement.
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What you found is that many people, even wealthy retirees, are underspending because they're concerned about running out of money or it's just difficult to make that switch from saving to spending. Whereas if they have a higher level of guaranteed income, they're more likely to spend it, more likely to enjoy their retirement, because they know they have another check coming in next month. Yeah.
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And to kind of put numbers to it. We were just talking about 4% or 5%. Well, it's kind of a complex analysis, but I would estimate withdrawal rates at retirement closer to 2% from savings from most retirees. And I think part of it is we train people to be ants for 30 or 40 years. You got to save. You got to watch this balance grow, grow, grow, grow. You don't want to work at Walmart. And so we've created a system that is all about saving, not about spending. And it's not easy for people to do that. You just can't flip a switch. Well, some people you can, but for most people, you and just all of a sudden get to spending. So I think that's where thinking about why defined benefit plans work so well is they provide that lifetime income. I think that 401 s are here to stay, but there are aspects of them that I think retirees would benefit from. We see this today to your point, in the US And Australia, other developed countries that have really robust, defined contribution systems, people get to retire with these big balances and then just don't spend them.
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You recently took a look at not only retirement spending patterns, but also retiree satisfaction. What did you find?
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So I think that it's important to kind of think about retirement satisfaction for a few reasons. Right? I think that we have people that, like, talk about a retirement crisis and things like that. And, you know, I don't believe we have a retirement crisis or new one because retirees are a very, very content bunch. Right. I know that people run these kind of really complex mathematical models and these simulations and say, oh, we're like people who aren't going to replace their income, blah, blah, blah, blah. If you ask people in retirement, are they satisfied, over 90% are moderately or very satisfied with retirement. And it gets even higher as people get older. It gets to like 95 to 99% at the oldest ages. So at a really high level, retirees are a very content bunch. Okay, so why that's important is it says to me, let's not burn down the system and do something else, but let's think about what are the factors related to retirement satisfaction. And I've been doing research on this right now, and there are things that are very financial in nature, like retirement savings and lifetime income. Okay. The more wealth you have, the happier you are.
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Right?
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And not just wealth, it's also lifetime income, but also there's things like health. There's things like your overall subjective health, like, am I a healthy person and am I socially connected? And if you run complex regressions, all of these things are important, both individually and then when you control for all the other stuff going on. So I think that retirement subjects is important because I spend a lot of time building these complex mathematical models to optimize a portfolio. And it doesn't matter how efficient that portfolio is if you can't sleep at night. So I think there's just a lot of behavioral outcomes, things we need to be aware of. We talk about strategies, and these things are important. So I think that at a high level, retirees are a pretty content, pretty satisfied bunch. But things do matter. The more wealth, the more health that you have, the happier you're going to be on average.
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Well, thanks for joining us again, David. This has been so much good information.
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Sure thing.
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It's time to get it done, fools, and this week, give some thought to your 401 s with old employers, including the ones you may have forgotten about. According to a recent report from Capitalize, a firm that facilitates 401 rollovers, there are now $31.9 million left behind or forgotten 401 accounts worth approximately $2.1 trillion. How can you locate a long lost account? According to an article on the topic from USA today's Daniel de Visit, you can try a few databases such as the National Registry of Unclaimed Retirement Benefits, the Department of Labor's Retirement Savings Lost and Found database, or missingmoney.com which is the official unclaimed property website of the national association of State Treasurers. Private companies such as Capitalize and Beagle can also do a search for you. But to use any of those sites or services, you have to hand over your personal info, including your Social Security number. In some cases, and as we discussed in the first segment of today's show, disseminating that info can be risky, so you may want to just start by just making a list of every employer you've worked for and confirm that you have made the best decision with each of your old 401s. You could even call the HR departments of those old employers to see if you still have an account with that employer's plan. Then if you find one, move that money to your current employer's plan or probably better, to an IRA where you'll likely pay lower fees and have many more investment choices. And that's it for this week. Thank you so much for listening and much appreciation to Bart Shannon, the engineer for today's show. As always, people on the program may have interest in the investments they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell investments based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show Notes. I'm Robert Brokamp. Full on everybody.