NEW RESEARCH: Your Plan Is Overestimating Retirement Costs (by 20%)

Full analysis

A new study tracking nearly 8,000 American retiree households found that 85% spent less in real (inflation-adjusted) terms than they had 10 years earlier — the opposite of what standard planning software assumes. Taylor Schulte, host of the Stay Wealthy Retirement Show, argues this means most retirement plans systematically overestimate costs, and that a spending model aligned with actual retiree behavior can support a meaningfully higher starting withdrawal rate than the traditional 4% rule.

What was covered

• The standard planning assumption being challenged. Most financial planning tools, including the original 4% rule developed by Bill Bengen in 1994, assume inflation-adjusted spending stays flat for 30 years — meaning every year's withdrawals are adjusted upward by the full inflation rate. Schulte argues this assumption is not supported by data.

• David Blanchett's new study. Retirement income researcher David Blanchett used the University of Michigan's Health and Retirement Study — 11 waves of data from 2001 through 2021, nearly 8,000 household observations — to track how real spending actually evolves from age 60 to 90. Finding: for the typical retiree, inflation-adjusted spending declines steadily throughout retirement.

• The smile vs. smirk debate. Blanchett's 2014 research described a "retirement spending smile" — spending dips through middle retirement, then curves back up late in life due to healthcare costs. RAND economists documented a "smirk" — spending declines that persist through the end of life with no uptick. The new paper finds both are partly correct: the median retiree follows a smirk, but the average is pulled up into a smile by a small number of people who face catastrophic healthcare costs late in life.

• Healthcare is the key complication. Healthcare grows from under 5% of spending for households under 35 to about 15% by age 75. Medical inflation has averaged roughly 5.1% per year since 1957 vs. about 3.6% for everything else. Despite this, total real spending still declines for most retirees — healthcare's rising share is offset by reductions in almost everything else.

• Choice, not just necessity, drives the decline. Blanchett divided retirees into five groups by "funded ratio" (total assets plus future income divided by projected lifetime spending needs). Even adequately-funded retirees cut real spending by about 3% per year on average. The very overfunded group increased spending by only about 1% per year — far less than their resources allowed. Notably, every group spending $80,000 or more per year reduced spending as they aged, regardless of how well-funded they were. Only the most underfunded group (cutting roughly 7.5% per year) looked like necessity-driven belt-tightening.

• Withdrawal rate implications. Using a model with a retiree collecting $30,000/year in Social Security and a $1.5 million portfolio gap (total spending goal $60,000/year, $40,000 essential and $20,000 flexible), Blanchett found the highest sustainable starting withdrawal rate under constant spending was about 5.2%. Under the smile and smirk models it rose to 6.2% and 6.4% respectively — roughly 20% more income from the portfolio. On a $2 million portfolio that translates to $104,000 vs. up to $128,000 in annual portfolio withdrawals in year one.

• Planning for the healthcare tail. Schulte urges listeners not to use declining-spending assumptions as license to ignore catastrophic healthcare risk. Among retirees who lived to age 95, the median incurred about $50,000 in unexpected out-of-pocket medical costs after age 70; the unluckiest 5% incurred roughly $250,000. Options: long-term care insurance (for those who qualify and can afford premiums), or a dedicated pool of assets earmarked for late-life care.

Notable claims & predictions

• Taylor Schulte: "As many as 85% of households spent less, after adjusting for inflation, than they had 10 years earlier — almost the exact opposite of what most retirement plans assume."

• Schulte citing Blanchett: Retirees spend about 80% of guaranteed income (Social Security, pensions) but less than half of what they could safely withdraw from their investment portfolios — suggesting portfolio underspending is structural, not just fearful.

• Schulte on withdrawal rates: "Accounting for how retirees actually spend could support a starting withdrawal rate roughly 20% higher than popular models suggest" — moving from about 5.2% to 6.2%–6.4% in Blanchett's modeled scenario.

• Schulte citing a Federal Reserve study: Retirees, on average, die with nearly twice as much savings as they had when they retired — offered as evidence of widespread underspending.

• Schulte on inflation: "Your portfolio needs to be inflation-aware, not inflation-obsessed" — and Social Security's cost-of-living adjustment (COLA) already functions as the best inflation hedge most retirees own.

• Schulte on the underfunded minority: About one in three retirees in the study had a funded ratio below 1.0 — spending at a pace their resources couldn't sustain. The most underfunded households were withdrawing at a pace closer to 8%, the most overfunded closer to 2%.

Fact check

Claim (Schulte/Blanchett): Medical care inflation has averaged about 5.1% per year since 1957; overall inflation excluding medical care has averaged about 3.6% over the same period. These figures come from the paper and are presented as historical averages over a very long horizon. Long-run averages can be accurate while masking the reality that medical inflation has varied considerably by decade and has moderated in some recent periods. This is a reasonable summary of the broad historical pattern but worth treating as an approximation rather than a precise, stable rate going forward.

Claim (Schulte): The 4% rule was developed by Bill Bengen in 1994. Accurate. Bengen published his seminal paper in the Journal of Financial Planning in 1994.

Claim (Schulte): Retirees on average die with nearly twice as much savings as they had when they retired, citing a Federal Reserve study. The claim that retirees die with substantially more wealth than they retire with is broadly consistent with research in this area, but Schulte does not name the specific Federal Reserve study or its date, sample, or methodology. Take the exact "nearly twice" figure as a rough characterization rather than a precise finding you can rely on without checking the source.

Claim (Schulte): The highest sustainable starting withdrawal rate under constant-spending assumptions in Blanchett's model is 5.2% — well above the 4% rule. Schulte correctly notes that Blanchett's model is dynamic (it adjusts spending over time and separates essential from flexible expenses), which is why it produces a higher rate than the original rigid 4% rule. This is a fair explanation, but it means the 5.2%–6.4% range should not be applied to anyone's own plan without checking whether their situation — portfolio mix, income sources, spending flexibility, time horizon — matches Blanchett's modeled retiree. Schulte does flag this explicitly.

Claim (Schulte): About 65% of retirees in the study had a funded ratio of 1.0 or higher. Reported as a finding from Blanchett's paper. No independent basis to dispute it, but note that the Health and Retirement Study skews toward people who have already survived into their 60s and responded to surveys, which may not represent the full distribution of retirees.

No claims rise to the level of clearly false or misleading. The main commercial incentive to flag: Schulte runs Define Financial, the advisory firm promoted at the episode's close, and a conclusion that listeners can safely spend more money creates an implicit case for hiring a planner to manage the strategy. That doesn't make the research wrong, but the episode is ultimately marketing-adjacent for planning services.

Why this matters for you

• Your plan may be leaving real money on the table in your healthiest years. If you're using standard retirement software that projects spending rising with inflation every year, you may be holding back more than you need to — and spending less than your resources actually support during the go-go years when travel, experiences, and family matter most. Worth asking your financial planner: