The retirement spending assumption most Washington State employees never question

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

The spreadsheet that grows forever

Doug shares his screen and pulls up the retirement spreadsheet he has been building since March.

He's 54, a public works supervisor with 29 years in PERS Plan 2, and he's clearly put real hours into this. Color coded tabs. Formulas stacked on formulas.

I scroll down to the spending column and stop.

Every year from 58 to 95, his expenses grow by 3 percent. Groceries at 87 cost more than groceries at 68. So does travel at 91.

"That's what inflation does," he says.

It is. But that isn't quite what happens to retirees.

Doug built the same assumption almost every retirement calculator builds. I've built it into plans myself without thinking twice about it.

The spending peak comes before retirement

The simplest version of the evidence comes from the Bureau of Labor Statistics, which tracks household spending by age. Spending peaks for households headed by someone between 45 and 54, then declines for every older age group after that1.

Doug is sitting in the highest spending decade of his life right now.

You might expect the opposite. Healthcare takes a bigger bite as people age, and prices there have a long history of rising faster than everything else. The government even maintains a separate research inflation index built around households 62 and older to reflect that2.

So the raw ingredients point one direction and the actual spending goes the other.

A snapshot by age group has limits, though, because it compares different households at a single moment. Maybe today's 80 year olds simply grew up more frugal.

​Researchers went further and followed the same households for two decades. A study published this year in the Financial Planning Review by David Blanchett, using the Health and Retirement Study, found that inflation adjusted spending declines steadily through retirement for the typical household3. Stretch the window to ten years and as many as 85 percent of retiree households were spending less in real terms than they had a decade earlier3.

That doesn't mean fewer dollars leave the checking account. Most retirees still spend more actual dollars each year. Their spending just doesn't keep full pace with prices.

They aren't all cutting back because they have to

This is the part I kept thinking about after I read it.

If retirees spend less because the money ran out, then building declining spending into a plan is a mistake. You'd be planning to fall short.

But the study sorted households by how well funded they were, from badly underfunded to very overfunded. The underfunded households cut hard, which is what you'd expect. The adequately funded households still trimmed their real spending. So did the overfunded ones3.

Only the most overfunded group increased spending at all, and barely. Nowhere near what their resources allowed3.

There's also a pattern worth noticing if you're reading this. Households spending $80,000 or more per year reduced their real spending regardless of how well funded they were3.

Diligent savers with comfortable plans, still pulling back.

Why your DRS pension changes this math

That pattern lands differently when you have a pension.

Your Plan 2 or Plan 3 benefit receives an automatic COLA each July once you've been retired a year, and that COLA is capped at 3 percent, with anything above the cap banked for future years4 5. Social Security adjusts annually as well6.

Members raise that 3 percent cap with me constantly. What happens in a year like 2022?

It's a fair concern and I'm not waving it off. But the research changes the size of it. If your real spending drifts down over time instead of climbing with inflation for 35 straight years, a capped COLA has less ground to make up than the worst case in your head suggests.

There's a second piece. Your pension and Social Security tend to cover the essentials, which are the most inflation sensitive part of your budget. Your DCP and personal savings fund the flexible spending. Travel, hobbies, the camper, the grandkids.

Flexible spending is exactly the category that fades with age.

What I told Doug

I didn't tell him to delete the inflation column. The fix is to stop applying it uniformly out to 95.

If he retires at 58 and his most active decade runs from 58 to 68, the plan should show higher spending in those years and lower spending later, rather than a smooth line that overstates 85 and understates 60.

The healthcare tail needs its own line. Most retirees never face a catastrophic late life medical event, but a meaningful minority do, and it's expensive3. That risk belongs in the plan as a funded item, whether through long term care coverage or a dedicated pool of assets. It shouldn't sit there as a vague fear that quietly shrinks every year of spending.

None of this touches the bridge, either. Doug retires seven years before Medicare, and PEBB continuation or a marketplace plan is a real cost in exactly the years his other spending will be highest. Lower spending at 82 does nothing for the premium at 59.

Where to start

Open your own projection and find the spending column.

Ask what growth rate it uses, and whether that rate changes anywhere between 60 and 95. If it grows at a constant rate for three and a half decades, you're looking at an assumption rather than a forecast.

Then ask a harder question. What would you do differently at 60 if the plan gave you room to?

Doug's answer was a fly fishing trip he'd been putting off for six years. Nothing in this research says he has to take it. It just takes away one of the reasons he wasn't.

​Sources1. U.S. Bureau of Labor Statistics. "Consumer expenditures vary by age." Beyond the Numbers. https://www.bls.gov/opub/btn/volume-4/consumer-expenditures-vary-by-age.htm
2. U.S. Bureau of Labor Statistics. "Research Consumer Price Index for Americans 62 Years of Age and Older (R-CPI-E)." https://www.bls.gov/cpi/research-series/r-cpi-e-home.htm
3. Blanchett, David. "How Spending Evolves in Retirement: A Smile, a Smirk, or Something Else?" Financial Planning Review, 2026. https://onlinelibrary.wiley.com/doi/full/10.1002/cfp2.70032
4. Washington State Department of Retirement Systems. "COLA: Cost of Living Adjustment." https://www.drs.wa.gov/life/retired/cola/
5. Washington State Legislature, Office of the State Actuary. "Cost-of-living adjustments." https://leg.wa.gov/studies-audits-and-reports/actuarial-reporting/pensions/funding/cost-of-living-adjustments/
6. Social Security Administration. "Cost-of-Living Adjustment (COLA) Information." https://www.ssa.gov/cola/

-Seth Deal