Best to Sit for This Ovation...

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The Chicago Symphony Orchestra recently concluded the longest labor strike in its prestigious 128 year history. The issue at the heart of the dispute was the future of the pension plan offered to musicians. While pensions have become quite scarce in the private sector, they remain a cornerstone among the nation’s leading orchestras. Earlier this month, behind closed doors of the Mayor’s office, a deal eliminated the pension plan for the orchestra.

This is not surprising. Only about 15% of Fortune 500 companies offer pensions today, down from nearly 60% of companies just 20 years ago! This enormous shift in retirement saving responsibility has people changing the way they approach their retirement.

The solution to accumulating enough money is an easy equation; save more money and do so over a long period of time. But once you have all this money, how do you go about spending it during retirement? The longstanding adage calls for retirees to pull no more than 4% of investment account values during retirement each year. For example, a $400,000 IRA should produce $16,000 of annual income come retirement. Investing in a balanced portfolio of stocks and bonds should help keep pace with your withdrawal and even help offset the pace of inflation.

The 4% Rule makes good sense, but assumes that retirement spending is a steady game. Thirty years of Bureau of Labor Statistics data show a pattern of retirement spending declining persistently over a retiree’s life. Another study by Morningstar shows that spending declines 1%/year for the first decade of retirement, 2%/year for second decade and about 1%/year thereafter. JP Morgan used proprietary data from actual bank accounts and credit cards to track spending habits for retirees and found the same: more spending early on with a consistent decrease over time (see graph below).

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We are living longer, thank goodness, but this means retirement can last upwards of three decades, if not longer. With such an extended time in retirement, it makes sense that spending will vary over time. These periods of retirement can be broken into three distinct phases; the “Go-Go” early years of retirement, the “Slow-Go” years and eventually, the “No-Go” years.

During the early “Go-Go” years spending will be higher on getting out and enjoying retirement. This phase is the most expensive of the three as travel, home improvements and eating out are more prevalent. But studies show that each year into retirement brings a slightly reduced level of this spending. As health and energy start to slow, less is spent on discretionary items. The “No-Go” phase sees discretionary spending replaced with higher health care expenses.

But life isn’t a reflection of a bunch of data points. Planning for reduced spending in nice tidy 10-year bands is a good exercise and planning technique, but spending changes often will be an unavoidable event, most likely triggered by a health-related experience.

This realization that spending during retirement is not a straight upward sloping line, but rather a series of decreasing spending years means many may be able to enjoy the early years of retirement more than was originally thought. But the responsibility is on the individual and not the employer to make the math work. This most certainly means saving more of each paycheck and/or preparing to retire later in life.

A long retirement is a wonderful thing that can be wildly rewarding albeit, for many, laced with financial challenges.  However, much like the Chicago Symphony Orchestra, the pensions are gone but the show must go on!