Smooth Standard of Living (SOL) vs. SOL change with age
Until recently, I’ve always used the default settings for the SOL index (ie, a constant 100% SOL for my & my wife’s early retirement at age 58 through 100). However, after a lot of thinking and reading (1 – see note below), I’m now firmly convinced I get a more realistic model by changing the SOL index as follows:
Age band 58-64: 100% SOL
Age band 65-74: -2% decrease per year (ie, SOL index of 98%, 96%, 94% etc thru age 80 when SOL is 80%)
Age band 75-84: drop to 75% SOL and maintained at 75% thru age 84
Age band 85+: increase to 90% (to account for increased expenditures on health care- I did have this set to return to 100%, but that seemed unreasonable for reason's I won' go into)
In addition to the above, I’ve entered increased special expenditures at ages 58-62 (for a post-retirement ‘spending splurge’ to take care of moving expenses, a splurge in travel, etc) and again at age 90 ($150,000 for medical issues).
By modelling SOL as above, the “Annual Suggestions” and other outputs show some significant changes (that are reasonable and favorable), so before I rely on those recommendations I‘d like others opinions on any pitfalls I’m overlooking by veering away from assuming a smooth SOL.
(1) I’ve created my SOL index based on observations from the following: Wade Pfau, Somnath Basu, David Blanchett, Katherine Roy, and my favorite – Robert Carlson. Also, I’ve personally observed significant spending decreases with age for my parents and in-laws (even accounting for medical expenditures.
(2) I do understand the value of consumption smoothing, so I have and will always maintain for comparison a “base profile” set to defaults, including the constant 100% SOL.