You'll spend less in retirement than you think (the "spending smile")

What the data says

David Blanchett, now one of the most cited researchers on retirement income, analysed how retirees' real spending changes over time. The result is a curve that looks like a smile, hence the name retirement spending smile:

• early years: real spending declines slowly. People travel and take on projects, a little less each year;
• middle years: the decline speeds up, to about 2% a year. People go out less, travel less, buy less;
• final years: spending rises again, driven by health and care costs.

On average, real spending falls by about 1% a year through retirement. That may not sound like much, but after 20 years it means spending about 18% less, in real terms, than at the start.

What it changes for your FIRE number

Compare two spending assumptions over 40 years, starting at €30,000 in year one: spending constant in real terms, or falling 1% a year. Discounting at a 3% real return, the value of all future spending drops by about 14%.

Put simply: if your FIRE number with constant spending is €850,000, a realistic spending profile might need a noticeably smaller portfolio, or, for the same portfolio, you could afford to spend more in the early years, when you have the most energy to enjoy it.

The Italian case: the tail of the smile

In Italy the national health service covers most medical care, but not long-term care. A live-in carer, a care home or adapting your home can cost thousands of euros a month in the last years of life. That's the final part of the smile, and it needs planning:

• by keeping a dedicated reserve for long-term care, separate from everyday spending;
• by counting the value of your own home, which can become a resource at that stage;
• by considering whether long-term care insurance makes sense in your situation.

How to apply it to your plan

1. Work out your FIRE number with constant spending: that's your cautious scenario.
2. Build a realistic scenario: full spending until pension age, then a gentle real decline, with a reserve for the final years.
3. Use the difference between the two not to retire early at all costs, but as a safety margin or as a budget for the years when you most want to live.

It's also a good reason not to put things off too long: money spent at 60 on a trip you've always wanted is worth, in life terms, far more than the same money at 85. For the withdrawal rule that suits changing spending, see how to withdraw from your portfolio.