Why It's Time to Drop the 'Set It & Forget It' 4% Rule

“In practice, the time in the 60s and 70s is the sweet spot when people still have their health, and this affords them the ability to travel and really enjoy life,” Berg says. “One couple always comes to mind for me. … They took their first trip, came back, and they were different people. It’s been a joy each year as we set a budget for enjoying a lifetime of earning.”

The Spending Smile

Berg says his practical experience serving clients has given him a great deal of perspective about how lifestyles and spending patterns evolve during retirement. This experience, he adds, is also reflected in the findings of research into the “retirement spending smile.”

Simply put, real-world data shows average spending in retirement starts out higher as people remain active and engaged. Then spending tends to fall during the middle period of retirement, as people see their health decline and their lifestyle interest shift away from travel and big purchases.

Lastly, as retirees age and they face more intense healthcare needs and require support with daily living, spending once again climbs, representing the other side of the spending “smile.” Throughout this journey, Berg notes, spending also generally shifts across categories, with less money being spent on things like vacations and big-ticket purchases later in life.

While not universally true, Berg adds, medical costs tend to rise in the middle and late retirement periods, but this increase is often blunted by support coming from Medicare and other forms of insurance.

“We have also definitely seen that expenses vary by individuals’ circumstance,” Berg says. “Overall, it goes to show that income is a very dynamic issue that needs to be managed and constantly revisited.”

Risk & Insurance

In Berg’s experience, it’s also important to factor in client perspectives about different forms of insurance during the planning process, including consideration of guaranteed income annuities and long-term care insurance.

In many cases, he explains, the math shows that the purchase of annuities or long-term care insurance makes a lot of sense from a purely financial perspective, but behavioral issues can be a hurdle to optimal planning.

“Some people avoid insurance at all costs,” Berg states. “Other people are very, very comfortable and see it as a great tool to manage the fears or concerns that they have. So, as we’ve been saying all along, financial planning is not one-size-fits-all. You really have to customize it to that client and their specific circumstance and their mentality.”

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