The Retirement Spending Myth: Why the 80% Rule Gets It Wrong

In today’s episode, we’re tackling these topics:

• Why retirement spending is not a straight line
• How spending often declines in mid-retirement and rises again later
• The Go Go, Slow Go, and No Go phases of retirement
• How fear of running out of money causes many retirees to under-spend
• A practical way to estimate your real retirement spending needs

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

If your retirement plan assumes you spend the same amount each year in retirement, you may be planning for a retirement that just doesn’t exist. Retirement spending does not move in a straight line. It changes. So, in today’s episode, we’re going to talk about what the research shows, while the 80% rule often misses the mark, and how you should be thinking about your retiree spending to design a plan that works for you.

Walter Storholt:

Hey, welcome back to another episode of Retire Smarter. I’m Walter Storholt, as always, joined by Tyler Emrick, certified financial planner, chartered financial analyst, one of the wealth advisors at True Wealth Design. As always on this show, we’re going to try and help you do just what we call the show, Retire Smarter. And we’ve got a great topic today, breaking down that 80% rule and why it often gets it wrong. And I’m intrigued by this, Tyler, because there’s a lot of good data out that tackles some old assumptions here. So, this can be great.

Tyler Emrick:

Oh, absolutely. Well, and I mean, spending, I mean, it’s on the top of a lot of retirees’ minds, Walt. I mean, there’s many studies out there, and data and research on this, but most of them have a pretty general consensus that somewhere around two thirds of Americans worry about running out of money in retirement more than they worry about dying and passing away in retirement. So, I mean, the spending can be a very big source of stress, and concern, and just like this big black hole of unknown. So, it’s always good to talk about it and always good from a standpoint of advising. Just, hey, what should retirees be thinking about, and how do they apply typical spending patterns to their own situation to create better outcomes, and better plans and all that good stuff?

Walter Storholt:

When I was younger, I never really understood that mentality. But with each year that I age, I understand it more, that fear of running out of money versus the dying. It’s like, okay, I’m starting to get that mentality, that line of thinking a little bit more.

Tyler Emrick:

Sure. No. And it could be a major source of stress. So, it’s a topic that… Spending is really a conversation that we’re having on most every meeting with the families that we work with and certainly very heavy when we first start working with a family. And really, I mean, when I look back earlier on in my career, Walt, I probably didn’t, or I know I didn’t place as much importance as I should have on having that conversation and understanding spending. It was really early in my career, just a conversation of, “Well, hey, how much do you need to live off of per month? All right, let’s roll with it.” Very little fact checking or helping individuals and families understand how their spending might change throughout retirement.

And taking those very simple numbers and saying, “Hey, how much are you spending?” It could just lead to outcomes that aren’t nearly as optimal as they should be. I don’t know, Walt, have you heard? I’m sure you’ve ran into the 80% rule. Probably some of our listeners have ran into it as well, where retirees are trying to, again, wrap their arms around spending. And they go to these general rules that say, “Hey, you take about 80% of your pre-retiree spending and that’s a good estimate for what you’re going to need throughout the course of retirement.”

Walter Storholt:

Yeah. It’s nice to have those kinds of things that we can pull off the shelf and use easily. Love it when we can simplify it in that way. But if it leads us to end up being several thousand dollars off, it dramatically changes our retirement picture in one way or the other.

Tyler Emrick:

It can. And you got to think. I mean, these retirement plans, I mean, we’re projecting out 30 years down the road, sometimes longer. So, those small tweaks and changes really impact results and how you might or might not use the wealth that you’ve built. And when we get down into the data, which we’ll talk about here later on in the episode, it’s a lot of times you’re spending. You can almost think of it as actually changing almost by decade and framing it that way. And as I see the risks as we think about retirement planning and spending, I think there’s certainly a risk where, hey, if you do under-plan and you overspend, hey, that’s a very legitimate concern. But on the flip side of that, Walt, I think there’s also just as much or at the same risk of, well, hey, if you over-save and under-live in retirement as well and don’t use that wealth, the way we can-

Walter Storholt:

We don’t want to leave a opportunity and experience on the table. Or we could’ve retired maybe three years earlier if we’d had the numbers and that opens up a whole nother case of opportunity.

Tyler Emrick:

It does. So, that’s why we focus on retiree spending and trying to understand the data, because we really feel like it provides better outcomes from a planning standpoint. So, as we look at that data, well, what does it actually say and where do we lean on, and where are we trying to get that information from? We’ve had any longtime listeners to the podcast. I mean, you’ve definitely have heard the name David Blanchette and their retirement spending smile. And this is data that we really believe in, and lean on and is at the crux of how we think about retiree spending.

And the general concept here from David Blanchette’s work is the concept of, hey, early in retirement is likely going to be where you have your most spending. And this would be like, think of like your early sixties. And then each year that you progress through retirement, that retirement spend actually starts to decrease a little bit. And that decrease continues really up until you reach about your mid-eighties, and it bottoms out. And then it starts to ratchet up again towards the later life of retirement and spending. That would be things like healthcare increases.

Walter Storholt:

That’s what gets our smile.

Tyler Emrick:

You got it long-term care. So, yes, you could think of it as, “Hey, there’s our smile right there.” Starting high, early in retirement, plateauing or bottoming out in mid-eighties and then starting to ratchet back up again. So, if we think about like, hey, even myself, how I used to plan taking the same retiree spending assumption that, hey, you’re going to spend about the same amount throughout the entirety of retirement. Well, that can really lead to you thinking that you’re going to need a lot more in retirement assets to meet your retirement spending needs than what you actually do. Again, we’re projecting out over a long, happy, healthy retirement, so those numbers really do get exacerbated and can really be magnified. So, thinking about it that way, I think is very, very helpful, and really does add to a lot better outcomes.

Now, of course, well, hey, individual experiences certainly are going to vary, but the pattern is statistically persistent. So, we want to make sure that, hey, we’re starting with the right approach, and then we want to make sure that we’re bringing it down to each individual family or each individual’s actual circumstances and then go from there. Just about a month ago, I’d gotten an email from a family I’ve worked with for a number of years and they sent me the old picture of like, hey, they were in front of the local credit union. And the caption read like, “Hey, finally paid off the house.” And it’s always amazing to get those types of emails. They actually came back in. And I met with them earlier this week and we were talking about it. They’re about three years into retirement. So, they actually went into retirement with a mortgage.

But now that that mortgage is paid off, I mean, you could imagine the amount of spending that’s going to be decreased now that they don’t have that mortgage payment. And that’s a wonderful example of like, well, hey, you might have certain debt, you might have things that you’re paying on right now, and those might change as you think about your transition into retirement, and living into it.

Walter Storholt:

Yeah. Their smile became like a sharper grin.

Tyler Emrick:

Drop, right?

Walter Storholt:

With a drop on the side of the mouth.

Tyler Emrick:

A true drop. No more principle and interest. I mean, the escrow doesn’t go away. The good old property tax. As anybody in Ohio knows, property taxes are not insignificant around here, but certainly principal and interest payments, that’s a big drop-off for sure. So, as I think about how we generally present this to families. And maybe another way to think about it as you’re listening is, all right, if maybe the retirement smile isn’t sticking or that concept isn’t maybe as applicable to your situation, I would think about it in this other way where we kind of… We alluded to it a little bit earlier. But you think about your retirement and break it out into almost decades or 10 year increments. And the first decade of retirement, think about your early sixties, mid sixties, into the seventies, essentially you can think of them as your go-go years. These are things where you might be knocking off the old to do list, traveling a little bit more.

Walter Storholt:

We’re getting the RV. We’re going to Italy.

Tyler Emrick:

Yes, absolutely. You maybe still have a mortgage, but it’s running down and then you actually get that paid off. So, the mortgage gets paid off or maybe some other big debt finally gets paid down. And so, that payment kind of drops off and you’re doing a lot of the fun things that you’ve wanted to do and anticipated doing early in retirement. So, that first decade, the go-go years. And then as we think about going into the next decade, we call that or think about that as like the slow go years. Maybe you’re not traveling as much. A lot of the big trips or the to do items that you’ve wanted to knock off, trip to Europe, whatever the case is, you’ve done that, you’ve knocked that out. So, maybe a lot more of your travel is going to be more local or here in the US or whatever the case is.

So, that second decade, we start to slow down a little bit, but you’re still very healthy, you’re still moving great, still doing a lot of the things that you want to do. And then we transition into that third decade, which the no-go years. So, go-go years, slow-go years and no-go years. And then really, as you start thinking about later stage retirement, well, hey, your health concerns might be popping up, maybe having a little bit more of a healthcare need, you’re maybe not traveling as much. Certainly, from a debt standpoint, maybe a lot of that debt is paid off and you’re just really spending on those basic needs later in life.

Walter Storholt:

Your social calendar revolves around your doctor appointments at that point in life. That’s the reality of the no-go years.

Tyler Emrick:

It is. Absolutely. So, I think this poses a unique challenge for retirees though, because, Walt, whichever concept resonates most with you, whether it’s thinking about it in the terms of that retiree smile or breaking it down by decades in the go-go, slow-go and no-go years, both of them are basically saying, “Hey, early in retirement, that’s where you’re going to have the most heavy lifting from a spending standpoint.” And I think that could be a challenge for a lot of individuals and families to think about and say, “Well, hey, you got to have a lot of conviction and comfortability into your plan.” Walt, to be able to say, “Hey, I’m probably going to spend more now than what I am down the road.” And you got to have that confidence in your plan to be able to do that, because you start using some of your assets that you’ve spent years and years to accumulate, it can be a tough challenge for sure.

Speaker 3:

What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments, and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

Yeah. And I guess if I were to play devil’s advocate here, I would say, Tyler, all right, well, so I’m high, I’m low, and I’m high again. Well, doesn’t the 80% rule account then? I’m taking an average of those highs and those lows, so wouldn’t that still be a great thing to lean on or does the data say, no, it’s still not quite that easy?

Tyler Emrick:

Still not quite that easy, because even when we see the uptick later in life and maybe into those no-go years, the expenses aren’t significant enough to get you back to that early stage retirement spending. And that has everything to do… You think about like the mortgage example is a great one. The family that I mentioned earlier where they had paid off the house, one of the things that they added to their plan this year was to actually go… And their grandkids are down south. So, they actually added in a couple more trips to go in and actually pick up the grandkids, fly them back, and have them spend a week with them up here. Great use of your wealth. But obviously, you have to have health to be able to do that. And it’s not an insignificant add to the retiree spending when you start adding in a few more trips like that to go see family or whatever the case is.

Walter Storholt:

And not just paying for your flight tickets, but others as well.

Tyler Emrick:

Correct. So, you got that travel, you got mortgage payoff. Even as you think about purchasing cars. A very, very common scenario is for our individuals that maybe keep cars a little bit longer. You’re not purchasing cars as much because you’re not traveling, you’re not driving as much. I mean, here in Ohio, Walt, we travel. We got to drive everywhere.

Walter Storholt:

You’re putting miles on that then.

Tyler Emrick:

We typically are putting in the miles. But even some of our retirees as they continue through retirement and later like, “Well, hey, we’re kicking out the car purchase. We’re not going to buy as many as what we thought. We’re just not putting on the miles and the car’s fine.” So, all these little things really do start to add up. And it just doesn’t kick in or those late stage expenses traditionally through the data just aren’t getting you back up to that 80% pre-retiree spend from there.

Walter Storholt:

So, how do you guys do it at True Wealth Design? Are you just looking for a different number than 80% to assume? Or do you have much more flexible numbers that you apply throughout the planning process? What’s your approach?

Tyler Emrick:

So, I think we’re really trying to start and say, well, where’s the best data we can use that can help us wrap our arms around how our families or clients are spending” And the best way that we feel to do that is to take a prior year of information and work off that. So, for example, if we start working with a family, say here in March of 2026, what we’re going to do is we are going to look back on that prior year and do an exercise where we start to identify where spending went for the family that we’re working with. So, the first place that we like to start is we start to look at the tax return, because the tax return, Walt, is going to give us a very high level overview of like, hey, what came in from earning, from working, and then what went out. What went to taxes?

I mean, good old Uncle Sam, when we start to see some of that data on how much families are actually paying in taxes, you can be a pretty big number, Walt. Certainly, when you’re looking at it from a percentage standpoint or even from a dollars and cents standpoint. But that tax return is going to tell us again how much you’ve made, how much went to taxes, how much was put into your retirement accounts. Obviously, as you think about retirement, you’re not traditionally saving into an employer 401(k) plan or an IRA anymore. You’re trying to shift. You’re starting to use those assets as opposed to continue to save. And that gives us what we call a baseline number. And then we have a very candid conversation with the families to say, Hey, where are the big expenses that you had last year?

Did you replace your water heater? That was a couple thousand bucks. Did you replace a roof or have some major work on your house? You’re not going to have to have that expense every year in retirement, hopefully. So, we want to identify that, pull it out and account for it separately. Are you making a mortgage payment? Well, when is that mortgage going to be paid off? Let’s identify that mortgage payment and peel that off, so that way we can add that back in down the road as a separate expense. So, this exercise allows us to identify the big items families are spending money on. And we can get down into a number, that is what we call just basic retirement living expenses, which is a number that we feel pretty confident is going to be the same throughout the entirety of retirement. This is things like paying property taxes, paying your electric bill, buying groceries, things like that.

And then once we have that basic retirement expense number, then we turn our attention to thinking forward. Well, what expenses do we need to add back in to appropriate account for? Mortgage, for example, travel, future car purchases, and things like that. And we feel like what that does is it gives us a much more accurate representation of how the family wants to spend their money in retirement and what expenses might change as they make that transition. And it’s very common, Walt, for us, when we go and start talking about that spending expectation, well, hey, maybe we’re going to be traveling a little bit more because we’re not going to be working. Or, hey, maybe we’re going to have some other expenses come up that we want to have that we’re not paying on now. So, our job and our goal is to just try to get our best guess of what that might be.

It doesn’t have to be perfect, but what we find is, is it provides, and going through that exercise provides just a better overall estimate of how spending is going to change throughout retirement. So, that way we can really get down into the granularity of like, well, hey, can you retire now? How much more wiggle room do you have or safety margin do you have outside of the spending that we’re expected in case something comes up? And really help drive those conversations to provide better outcomes. I mean, it’s not a light decision to say, hey, I’m ready to go and I want to retire. We want to basically give you all the tools that we can and help paint that picture as clear as we can, so that way when you do say, all right, I’m going to pull the trigger, I’m going to go, you can do it with as much confidence as possible.

Walter Storholt:

You guys always take a very intentional approach to everything that you do from a planning process. I see it here. Obviously, we’ve got the standard 80% rule. That straight line, not good enough. Let’s use the retirement smile, better assumptions. But you still take it a step further and say, yeah, that’s our guide. We’re going to be around that smile. But one family’s going to have a couple of years that pop up above the smile and it might look a little crooked. Others might have a droopier smile. There’s still going to be a custom smile in a way for every family that you guys work with, it sounds like.

Tyler Emrick:

Oh, correct. And things change from year to year. Earlier this year, we had a family that wasn’t even on the radar to potentially move. But they’re like, “Nope, hey, we had a good opportunity. Our family’s down in Florida. We’re going to go. How much can we afford? What type of house would we be looking at?”

Walter Storholt:

Totally different plan than you originally started with.

Tyler Emrick:

Absolutely. But if we have the framework, it’s very easy for us to go back in, and test that, and give very clear results on how that impacts other spending, estate, anything else that would be important to them. We can help frame that decision in light of everything else that they’re trying to do, to help them feel more confident about, hey, in their case, how much could we afford to go down there? Where is our budget? Where should it be? And go from there.

Walter Storholt:

Great things to be thinking about, Tyler. Appreciate your guidance today on all of this. Hey, we’ve been talking for about 20 minutes, folks. That’s how long the discovery call is with True Wealth Design and the team, to see if you’re a good fit to work with one another. So, if you’ve maybe been building your financial plan based on some old assumptions or a retirement rule that really maybe isn’t the most accurate to use, like the 80% rule and you need to adapt that. Get a second opinion of where you’re headed, how you’re currently structured and planned. Or if you’ve never put together a solid financial plan in place to begin with, now is a great time to do that, to make sure you’re on track to get to and through retirement. Tyler and the team at True Wealth Design are happy to help with that.

All you have to do is click the link of the description of today’s show or go to truewealthdesign.com. Look for the button where you can click Let’s Talk and schedule a 20-minute discovery call with the team. And you can see if you’re a good fit to work with one another and then move forward from there or not. But that’s the great first step to take for anybody who’s listening or watching our podcast today. Definitely check it out if anything today resonated with you. Tyler, thanks for the help and good episode today. We’ll talk to you again next week.

Tyler Emrick:

Absolutely.

Walter Storholt:

All right. See everybody next time right back here on Retire Smarter.

Speaker 4:

Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.