You might need less money than you think, because you won't be able to cover some healthcare costs anyways, and your expenses will decrease with time.
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Alain Brin
Author Bill Perkins hopes to run out of money in retirement.
While he has saved for retirement, and he does hope to use that money, he hopes to really use it — he wants to spend his balance down to nothing. Instead of leaving a large inheritance, he'd rather use his money on experiences, helping his children while they're starting out, and spending the money on his needs.
While it goes against traditional retirement planning logic, Perkins says that people may be saving too much for retirement, holding them back from living and having meaningful experiences while they're able. While that comes at the expense of saving more for later, that might not be a bad thing.
In his 2020 book "Die with Zero," he explains that there are four big reasons many people could actually be OK saving a bit less than they originally thought they'd need.
Net worth, or a total of all of your assets minus any loans or debt, tends to increase with age. And, that includes into retirement years.
Perkins writes that about a third of retirees actually see their net worth increase in retirement. According to 2016 Federal Reserve Board data, median and average net worth for people over the age of 75 was higher than that of those 65- to 74-year-olds, also presumably past retirement age. The median net worth for those over age 75 was $281,600, compared to $237,600 for those between 65 and 74.
While some people did use up their money, many retirees actually see their net worth increase with time.
Healthcare costs are a major expense in retirement and, for many, a big surprise when it comes to retirement plan savings. But Perkins says it's not worth worrying about.
"To put it bluntly, no amount of savings available to most people will cover the costliest healthcare you might possibly need," he writes. He cites million-dollar cancer treatments and his father's $50,000-per-night hospital stay as examples.
While Medicare and its supplements can make healthcare more affordable, there's no way to save for the worst possible scenarios. "Uninsured medical care is so expensive, it won't make any real difference for the vast majority of us whether we save for it or not," he writes.
Ultimately, Perkins feels this money is better spent when you're younger. "It is much smarter to spend your healthcare money on the front end (to maintain your health and try to prevent disease) than to spend it at the end, when you get a lot less bang for every buck," he writes.
Many people tend to decrease their spending naturally as their expenses go down in retirement, and overspending doesn't seem to be an issue for many retirees.
"The median ratio of household spending to household income hovers around 1:1. This means that people's spending continues to closely track their income," writes Perkins.
Despite the fact that some items do get more expensive — take healthcare as an example — other things get cheaper. Perkins cites 2017 Consumer Expenditure survey data, where average spending for households aged 55 to 64 spent $64,000, 65- to 74-year-olds spent $55,000, and those 75 and older spent $42,000.
"This overall decline occurred despite a rise in healthcare expenses, because most other expenses, such as clothing and entertainment, were much lower," Perkins writes.
Perkins' book repeats the fact that most people only touch a portion of what they have saved.
To prove this, Perkins collected data from a range of retirement budgets. "Retirees who had $500,000 or more right before retirement had spent down a median of only 11.5% of that money 20 years later or by the time they died," he writes.
And, this pattern held true even for those with smaller savings. "Retirees with less than $200,000 saved up for retirement ... had spent down only one quarter of their assets 18 years after retirement."
While saving too much isn't inherently bad, it could be if it prevents you from doing the things you want to do while you're still able.
This article was originally published in May 2021.
