Your Nest Egg Might Last Longer Than You Think — Here’s What Retirement Projections Get Wrong

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Projecting how long your nest egg will last in retirement is part art and part science. Any time you make mathematical projections that extend multiple decades into the future, you’re likely to end up with a wide range of outcomes.

Even the slightest change in a single variable can yield massively different end results. Earning a few percentage points more or less on your investments, living a few years longer than expected or changing your spending patterns, for example, are just a few of the factors that can dramatically change the longevity of your savings. For this reason, many retirement calculators purposely use conservative estimates to help ensure users don’t outlive their money. But being too conservative comes with a cost as well.

Here’s a look at what most retirement projections get wrong, and how they can hurt your quality of life after you stop working.

The Big Problems: Inflation and Spending Assumptions

Inflation is an undeniably essential part of the retirement planning process. Like it or not, inflation is inevitable over the long run, and if you’re using today’s budget to pay tomorrow’s expenses, you’re going to come up short.

For this reason, most retirement calculators require you to input an annual inflation amount, with 3% often the suggested rate. But this is where most projections get off track. According to the Bureau of Labor Statistics (BLS), it’s a documented fact that most retirees actually spend less as they get older — in some cases, much less.

For example, between ages 55-65 and 65-75, the average spending decrease is 17%, according to the BLS. Costs decrease even further from there, with those over 75 dropping spending by an additional 24%. Even with inflation rates of 3%, 5% or even more, the data shows that spending still decreases as retirees get older, with the reduction beginning as early as age 65.

An analysis of this data by Kiplinger shows that those needing $60,000 to live at ages 55-65 will only need $49,800 between ages 65 and 75. After that, spending needs fall to just $37,848. The bottom line is that older retirees simply have fewer expenses. This likely comes from a combination of limited mobility and/or a desire to simply stay at home more often. That, in turn, reduces a host of expenses, from transportation and travel to eating out and even clothing costs. 

How Conservative Projections Can Reduce Your Quality of Life

Imagine that you live on $60,000 per year and you expect inflation to increase those costs at a steady 3% annually into perpetuity. Thirty years into your retirement, that would mean that you’d need over $145,000 annually to maintain the same standard of living. That’s a tough pill to swallow, as it means your actual expenses would rise by nearly a factor of 2.5x. But imagine instead that after 15 years, you start spending 20% less on an annual basis. In that scenario, you’d only be needing about $116,000 annually in your 30th year, not $145,000.

This change in perspective translates to a lot of meaningful adjustments. For starters, it means you won’t need nearly as large of a nest egg to start out with that you might otherwise imagine. It might also mean you don’t need to work as many years as you imagine. It can also mean that you can afford to enjoy the earlier years of your retirement than you thought. These are all big wins when it comes to retirement planning.

Caveats

Just because you might be spending less than you think in retirement, you shouldn’t use that as an excuse for cutting back on your savings. If you dial down your investments too much, you’ll still end up with a shortfall in retirement, even after factoring in your lowered costs. 

Another thing to remember is that a retirement plan is an ever-evolving instrument. Even the best projections are just estimations. As your real-world retirement unfolds, you’ll have to tweak your assumptions. For example, if your investments underperform for an extended period, you might have to generate more income or trim your expenses. If you suddenly have unexpected medical bills, house repairs or any of countless other financial emergencies, you’ll have to adapt to these as well. 

The bottom line is that your nest egg may very well last longer than you expect, given the patterns of spending that older Americans exhibit. Just remember that your retirement plan is unique to you, and you’ll have to tweak it and make modifications along the way to ensure it gets you to your goals. 

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