The Retirement Spending Smile: Why Your Expenses Drop 26% — Then Surge Back

Every retirement calculator you have ever used probably makes the same assumption: you will spend the same amount, adjusted for inflation, every single year from age 65 to 95.

That assumption is wrong. And if you are planning around it, you are either oversaving for your 70s or undersaving for your 90s.

Actual retiree spending follows a predictable pattern that researchers call the retirement spending smile. Your expenses start high, drop steadily through your mid-80s, then climb again as healthcare costs take over. Understanding this pattern — and building it into your plan — is the difference between a retirement that works on paper and one that works in practice.

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The foundational study comes from David Blanchett at Morningstar, published in the Journal of Financial Planning in 2014. Blanchett analyzed Consumer Expenditure Survey data and found that a household starting with $100,000 in annual spending at age 65 can expect real (inflation-adjusted) expenditures to decline to roughly $74,146 by age 84 — a nearly 26% drop.

After 84, spending reverses course and starts climbing, driven almost entirely by medical and long-term care costs. The Bureau of Labor Statistics confirms the pattern: households aged 65-74 spend an average of $57,818 per year, dropping to $45,756 for ages 75+ (2022 data, most recent available).

The three phases have informal names in the planning world:

AARP data backs this up in specific categories: adults 65-69 take 3.3 leisure trips per year, dropping to 2.5 for those over 75. Meanwhile, out-of-pocket healthcare spending rises from $6,700/year at age 65 to over $19,000/year by age 85 (Fidelity Retiree Health Care Cost Estimate, 2024).

Why Flat-Spending Assumptions Are Dangerous

Here is the problem with assuming flat spending: it distorts your plan in both directions.

In your early 70s, a flat assumption understates your needs. You want to travel, help grandchildren, renovate the house, maybe buy that boat. Real spending in the Go-Go years often exceeds what people budgeted because they underestimate how active they will be.

In your late 70s and early 80s, a flat assumption overstates your needs. You are not taking three international trips a year at 82. Your car expenses drop. Your wardrobe budget shrinks. Your entertainment shifts from restaurants to streaming. Flat-spending models keep these costs constant, creating phantom shortfalls.

In your late 80s and 90s, a flat assumption drastically understates your needs. This is the dangerous one. Healthcare inflation runs at roughly 5-6% annually — double or triple general CPI. A $10,000/year healthcare budget at 65 becomes $55,000/year at 95 if medical costs inflate at 5.8% while general expenses inflate at 2.5%. Most calculators apply one inflation rate to everything, hiding this compounding gap entirely.

The net effect: flat-spending models produce success rates that look reasonable but mask a specific vulnerability — running short of money in your late 80s and 90s, exactly when you are least able to go back to work or cut spending.

The Healthcare Inflation Wildcard

The spending smile is getting more pronounced. In 2026, Medicare Part B premiums jumped 9.7% to $202.90 per month. Oil above $100/barrel is feeding into medical supply chain costs. The gap between healthcare inflation and CPI is widening.

Here are real numbers that matter for your plan:

That $33,336 gap at age 95 is not a rounding error. It is the difference between a plan that works and one that fails in the final decade — the decade where failure means depending on family or Medicaid.

For early retirees (retiring before 65), the picture is even worse. You face 15-20 years of unsubsidized ACA premiums before Medicare eligibility. An $800/month ACA premium at age 50, inflating at 5.8% annually, becomes $1,660/month by age 65. And if your income crosses the 400% FPL ACA cliff, you lose the entire subsidy — a potential $15,000+ hit in a single year.

How to Model the Spending Smile Correctly

Stop using one number for spending. Here is a practical framework:

Step 1: Split your budget into spending categories. At minimum, separate healthcare from everything else. Better yet, break it into: housing (3-3.5% inflation), healthcare (5-6%), discretionary/travel (2.5%), and essentials (2.5%).

Step 2: Apply category-specific inflation rates. General expenses get CPI (2-3%). Healthcare gets medical CPI (5-6%). Education costs for grandchildren get 5% if applicable. Housing maintenance gets 3-3.5%.

Step 3: Schedule spending changes by decade. Reduce travel and discretionary spending by 2-3% per year starting at age 75. Increase healthcare allocation by 3-5% per year starting at age 80. Add a long-term care contingency ($8,000-$12,000/month) with a probability-weighted start between ages 82 and 90.

Step 4: Stress-test with Monte Carlo simulation. Run 10,000 scenarios with the spending smile built in. Compare the success rate against a flat-spending assumption. The difference is typically 5-8 percentage points — meaning your plan is less safe than you thought if you ignore the smile.

Step 5: Revisit IRMAA thresholds. Rising healthcare costs in your 80s may push you into higher Medicare Part B/D surcharge brackets. Model the interaction between Roth conversions, RMDs, and IRMAA to avoid paying $500+/month more for the same Medicare coverage.

What This Means for Your Retirement Number

If you are using the standard rule of thumb (25x annual expenses for a 4% withdrawal rate), the spending smile means you need less than you think in total — but you need more liquidity and flexibility than a flat model suggests.

The practical implication: a dynamic withdrawal strategy that adjusts spending guardrails by decade outperforms a fixed approach by a wide margin. Guardrails that allow 5-6% withdrawal rates in the Go-Go years and pull back to 3-3.5% by the Slow-Go years align much better with actual spending patterns.

The critical planning action is not saving more. It is modeling your healthcare costs separately with realistic inflation assumptions. The 4% rule fails not because markets underperform, but because healthcare costs in the No-Go years outstrip what flat-inflation models predict.

Run Your Own Spending Smile Scenario

QuantCalc's Life Events feature lets you model the spending smile directly. Schedule expense decreases in your 70s, healthcare increases in your 80s, and assign each category its own inflation rate — CPI for groceries, 5.8% for medical, 3.5% for housing. Then run 10,000 Monte Carlo simulations to see what your success rate actually looks like when spending follows the real pattern instead of a flat line.

The difference between a plan built on flat assumptions and one built on the spending smile is often the difference between "95% success rate" and "87% success rate." That 8-point gap is where late-retirement shortfalls hide.

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Frequently Asked Questions

What is the retirement spending smile?

The retirement spending smile is a pattern observed in retiree spending data showing that real (inflation-adjusted) expenses start high in early retirement (ages 65-74), decline roughly 26% through the mid-80s as activity decreases, then rise again after 85 as healthcare and long-term care costs dominate. The term comes from the U-shaped curve the spending pattern creates when graphed over time.

How much do retirees actually spend by age?

According to Bureau of Labor Statistics Consumer Expenditure Survey data, households aged 65-74 spend an average of $57,818 per year, while those 75 and older spend $45,756. David Blanchett's research at Morningstar found that a household starting at $100,000 in annual spending at 65 can expect real expenditures to drop to approximately $74,146 by age 84 before rising again due to healthcare costs.

Why does healthcare inflation matter more than general inflation in retirement?

Healthcare costs inflate at roughly 5-6% annually, compared to 2-3% for general CPI. Over a 30-year retirement, this gap compounds dramatically. A $10,000 annual healthcare expense at age 65 grows to roughly $54,274 at age 95 under 5.8% medical inflation, versus only $20,938 under 2.5% general inflation. This $33,336 gap is where late-retirement shortfalls hide.

Should I save more or save differently because of the spending smile?

You likely do not need a higher total savings target. Instead, you need more flexibility in how you withdraw. A dynamic withdrawal strategy that allows 5-6% spending in the active Go-Go years (65-74) and pulls back to 3-3.5% in the Slow-Go years (75-84) aligns better with actual spending. The critical change is modeling healthcare separately with its own inflation rate.

How does the spending smile affect the 4% rule?

The 4% rule assumes flat real spending, which overstates needs in your late 70s and understates them in your 90s. When you model the spending smile with category-specific inflation, success rates typically drop 5-8 percentage points compared to flat models. A plan showing 95% success under flat assumptions may actually be 87% when healthcare inflation is modeled separately.

QuantCalc is an independent educational tool. Not affiliated with, endorsed by, or sponsored by any referenced firm including BlackRock, J.P. Morgan, Vanguard, GMO, Schwab, Invesco, Morningstar, or Fidelity. Return assumptions derived from publicly available research. All trademarks belong to their respective owners. Not financial advice.