Most retirees worry about running out of money because of spiralling inflation and unexpected medical costs as they get older.
However, after studying the spending patterns of five million retirees, JPMorgan has uncovered surprising information that some of these concerns might be overblown.
Perhaps the biggest shocker in their report is that some retirees might not need as much savings as they believe to retire comfortably. Here are three reasons why.
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1. Inflation isn’t as scary
Most financial planners make some basic assumptions about inflation. Put simply, they assume that your spending in retirement will probably increase every year in line with the cost of living in recent years.
According to JP Morgan’s analysis, inflation has averaged 2.9% from 1982 to 2024.
However, that’s the general rate of inflation for all categories, while retirees tend to shift their spending patterns as they age.
For instance, a retiree may have to spend more on healthcare as they get older, but they spend less on clothes, eating out and transportation since they don’t have to go into the office everyday.
In other words, higher costs in some categories are offset by lower spending in others. Overall, a typical retiree with modest wealth should see annual living expenses gradually decline over the course of their retirement, which means their experience of inflation is different from someone in their peak earning and spending age.
“Looking across the range of households in our dataset, our key finding is that people generally spend less than expected,” says a previous report from JPMorgan.
“In fact, for partially and fully retired households with investable assets of $250,000 to $750,000, the annualized inflation-adjusted change in spending — is just 1.65%.”
2. Big, temporary bump in spending
JPMorgan’s analysis also uncovered a curious surge in spending in the few years before and few years after a person’s retirement. In other words, there’s a temporary bump in spending around this period, mostly on healthcare, apparel, housing, food and beverages.
Retirement is a new chapter in your life and it’s likely that you will spend the first few years moving to a new location or indulging in leisure activities that you always dreamed of.
Read more: Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
However, after this initial surge, spending tends to stabilize and gradually decline as mentioned above.
Nevertheless, your retirement plan should account for this temporary bump in spending.
3. Everyone doesn’t spend the same way
Retirement planning isn’t a one-size-fits-all endeavor. Depending on your health, life goals and personal relationships, your senior years could look very different from the average person’s.
To account for this, JPMorgan places retirees into six different categories depending on their spending patterns.
These categories range from ‘Steady Eddies’ who spend a consistent amount of money, to ‘Upshifters’ who enhance their lifestyle post-retirement and ‘Rollercoasters’ who see unpredictable volatility in lifestyle.
If you plan to move to a bigger house or another city or state with higher costs of living to be closer to your loved ones, your retirement plan needs to account for this.
How to plan better
Based on all the research, it might be fair to assume that building a retirement plan on general assumptions probably isn’t the best idea. For the most comfortable retirement, you need to personalize your plan.
If you think you’ll travel more during your senior years or downsize to save on housing costs, that could have major implications for the amount of money you need to retire and how your portfolio is allocated.
Hiring a professional financial planner to assist you and to update your plan every few years to stay in line with your changed circumstances could be a better approach.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
