Your spending may fluctuate wildly in retirement. Here's how to plan for that

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There’s one key message you’ve inevitably heard when it comes to planning for retirement: Save, save, save.

Now it turns out that how you spend money during your golden years could have as much — if not more — of an impact on how well you live, according to research from J.P. Morgan Asset Management.

That conclusion comes from the firm’s analysis of more than 5 million Chase accounts.

And the results show that because the money that goes out fluctuates, traditional retirement rules of thumb may not always apply. That includes the widely cited 4 percent rule, which is aimed at providing a steady withdrawal rate that can provide income throughout retirement.

It also includes income replacement targets. Those typically state that if you have enough of your lifetime total pre-retirement income saved — say, 70 percent to 80 percent — you should have enough to live on.

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    “We see an increase in spending as people prepare for or transition into retirement,” said Katherine Roy, chief retirement strategist at J.P. Morgan. “That surge or volatility is much greater than we had thought.”

    And those behaviors could upend traditional savings rules, according to J.P. Morgan’s research.

    Your calculations of what you will spend may be flawed

    Chances are, as you age you will not spend as much money.

    But as you project certain constants — such as your weekly grocery bill — you may not have the most accurate calculations.

    That is because you likely will not buy the same items as your needs change. What’s more, inflation will play a big part in how much you have to spend.

    That makes it more likely that your estimates could be off.

    As a result, you could wrongly estimate the effects of inflation on your future spending needs.

    That could lead you to make the wrong retirement decisions when it comes to whether to keep working, put off spending or invest too aggressively in equities.

    A better solution, according to J.P. Morgan, would be to consider your changing needs and inflation on a category-by-category basis, such as for food, housing, transportation and travel.

    You’ll likely spend more at the start of retirement

    Once you reach retirement, you probably expect to seamlessly transition to a steady retirement spending plan.

    Yet J.P. Morgan’s research finds that’s often exactly the opposite of what happens — in the beginning of retirement, at least.

    That is because many retirees use that time to adjust to their new life phase. And that means plenty of spending — on travel, home renovations and other lifestyle changes.

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    “It’s really getting used to this new transition and new life stage. It’s going to cause spending on categories you might not anticipate,” Roy said.

    Consequently, your withdrawal strategies should anticipate that you may spend more early on.

    Because of that, you should be careful as to how much equity risk you take on early in retirement so that you do not deplete your savings. You also need to be aware of the tax consequences of the withdrawals you do make.

    Keep in mind, too, that your spending will continue to fluctuate from year to year throughout your retirement. That is because your financial needs may change as your medical bills increase or an unexpected car or tax bill crops up.

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