What is the Retirement Spending Smile?

The retirement spending smile is a pattern in retiree spending identified by David Blanchett: inflation-adjusted spending tends to fall over the course of retirement, declining slowly in the early years, fastest in the middle years, and slowly again late in life. Plotted as the annual rate of change by age, those declines trace a curve shaped like a smile.

Blanchett, then head of retirement research at Morningstar Investment Management, published the finding in “Exploring the Retirement Consumption Puzzle” in the Journal of Financial Planning in May 2014. It matters because, as Blanchett noted, most retirement income research, including the studies behind the 4% rule, assumes spending rises with inflation every year for life.

What the Research Found

Blanchett tracked the actual spending of 591 retired households from 2001 to 2009, using the RAND versions of the Health and Retirement Study and its Consumption and Activities Mail Survey. Between ages 60 and 90, real spending fell by an average of 0.96% per year, or roughly 1%.

The smile describes how the size of that decline changed with age. Declines were smaller for younger retirees and for the oldest retirees, and larger in between. Blanchett attributed the shape to younger retirees being better able to travel and stay active, and to older retirees facing higher medical costs. His separate look at Consumer Expenditure Survey data found health care making up about 10% of total spending for 65-year-old households and about 20% for 85-year-old households.

Spending level made a difference too. Among households whose spending matched their net worth, those with lower spending tended to cut back less as they aged. Households with above-median spending but below-median net worth cut back considerably, while those with modest spending and high net worth tended to increase spending between 65 and 75.

Does Spending Rise Again Late in Retirement?

Not in the data, on average. Describing the smile as spending that dips and then climbs back up reads more into the chart than the data shows. In Blanchett’s words, the overall changes in real spending were “clearly negative; the only real variation is the extent of the negative change.” The late-retirement upturn is a slower decline, not a return to earlier spending levels.

The spending curves he built for his modeling do turn upward at very old ages, but he adjusted them deliberately to allow for future medical cost increases beyond what the historical data showed. For an individual household, a long-term care need can still push late-life spending well above anything an average captures.

Why the Spending Smile Matters for Withdrawal Rates

If real spending falls over time, a plan that assumes flat inflation-adjusted spending overstates what retirement costs. In Blanchett’s Monte Carlo test of a 40% stock, 60% bond portfolio over 30 years, a 4% initial withdrawal rising with inflation succeeded 73.3% of the time. The same 4% start following his spending curve for a $50,000 retiree succeeded 86.0% of the time.

He also found that a 5% initial withdrawal on that curve, measured over a 65-year-old couple’s joint lifetime, had about the same success rate (70.3%) as the constant 4% strategy over 30 years. A 5% starting rate needs 20% less savings: $800,000 instead of $1,000,000 to produce $40,000 a year.

This cuts both ways. Blanchett noted it’s hard to tell whether retirees spend less because they want to or because they have to, and some of the decline may reflect households adjusting after under-saving. A plan built on declining spending has less room for error if your spending doesn’t actually fall. Consumption smoothing and sequence of returns risk are both relevant when deciding how much to lean on it.

How to Model the Retirement Spending Smile

Separate health care from other spending in your plan, so it can grow faster than general inflation while discretionary spending on travel and hobbies tapers. Then decide how much real decline to assume in your core spending, anywhere from none to around 1% per year, and compare the results. Placing a few control points on an Advanced Change Over Time schedule for your retirement living expenses in ProjectionLab bends them into a path that declines fastest in your seventies and eighties, which you can test against spending that simply matches inflation.

Frequently Asked Questions

Who created the retirement spending smile? David Blanchett, in “Exploring the Retirement Consumption Puzzle,” published in the Journal of Financial Planning in May 2014. He was head of retirement research at Morningstar Investment Management at the time.

How much does spending decrease in retirement? About 1% per year in inflation-adjusted terms on average in Blanchett’s data, with the fastest declines in the middle of retirement. Your own pattern will depend on your health, your spending level, and how much of your early-retirement budget is discretionary.

Does retirement spending go up at the end of life? Not on average. In Blanchett’s data, total real spending kept declining late in retirement, just more slowly than in the middle years, even though health care made up about 20% of spending for 85-year-old households compared with about 10% at 65. Long-term care can still raise an individual household’s late-life costs sharply.

Should I plan for spending to decline in retirement? A modest assumed decline can be reasonable, but it trades a lower savings target for less margin. Testing both a flat and a declining spending path shows how much of your plan’s success depends on the assumption.