Reverse Mortgages and Reality Retirement Planning
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The Journal of Financial Planning published a thought-provoking article - Reality Retirement Planning - that could have a significant impact on reverse mortgage thinking. The gist of the article is that the traditional view of retirement financial planning needs to be modified to better reflect “real” retiree spending patterns as evidenced by data from the U.S. Bureau of Labor’s Consumer Expenditure Survey:
Traditional retirement income planning generally assumes that a household’s expenditures during retirement increase by a certain percentage each year to reflect historical inflation rates. This type of planning usually results in increasingly higher withdrawals from the retiree’s nest egg to help sustain inflation-adjusted expenses throughout retirement.
Reality retirement planning is similar to the traditional approach in that it increases spending for inflation. This strategy differs from the traditional approach because it assumes that a household’s real spending needs decrease incrementally throughout retirement. Reality retirement planning is like a tug-of-war match, with inflation pulling spending needs up and human nature’s tendencies pulling spending back down. Ultimately, this tug of war more accurately depicts the average American’s spending patterns throughout retirement.
The author’s thesis is simply that senior citizens naturally tend to spend less as they grow older and that traditional models of retirement financial planning overlook this important fact. As example, data show a 27 percent reduction in average annual expeditures between the 55-64 age group and the 75+ age group.
The “reality retirement planning” model certainly isn’t widely accepted at this juncture. Further, it is subject to criticism on several fronts - for example, understating the impact of rising healthcare costs on senior citizen spending.
Still, the idea has intrinsic appeal and many people can point to anectodal experience with parents or seniors that supports the idea. Even if “reality retirement planning” is only partially on target, it could have important implications for anyone considering a reverse mortgage.
We’ll explore some of the ways reality retirement planning might impact reverse mortgage plans in future posts. In the meantime, you may want to take a few minures to read the aforementioned article. Whether or not you agree with its conclusions, it will definitely stimulate your thinking about retirement needs.
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