Schwab Warns of a Spending Shift Waiting for Retirees

 

Schwab Warns of a Spending Shift Waiting for Retirees

**The math retirees trust most may be the math that fails them.**

Let me tell you about a conversation I had recently with a retired couple. They did everything right. Saved for thirty years. Paid off the house. Worked with a financial advisor. And now, they're terrified to spend a dime of their savings.

They're not alone. In fact, according to new research from Charles Schwab, they're the rule, not the exception. And the math they're relying on—the math that says a steady 4% withdrawal will carry them through—may be the very thing that's holding them back.

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## The Warning from Schwab

The Schwab Center for Financial Research recently flagged something that should stop every retiree in their tracks. Spending needs can shift meaningfully across a 30-year retirement, the firm cautioned. And the flat-spending assumption that most plans rely on—the idea that you'll withdraw the same inflation-adjusted amount every year—can be costly for retirees who follow it without adjustments.

Rob Williams, Senior Wealth Management Executive at Schwab, put it bluntly: "You can make educated guesses, but they're just that—guesses. And that makes it difficult to know if your money will last long enough".

The problem is simple on its face. Retirement plans assume a straight line. Life doesn't work that way.

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## The Sequence of Returns Risk: A $400,000 Problem

Before we get to the spending curve, let me tell you about the risk that Schwab says retirees overlook most: **sequence-of-returns risk**.

Here's how it works. Two retirees start with identical $1 million portfolios. They take $50,000 in year one, with 2% annual inflation adjustments. Both experience a 15% portfolio decline over two consecutive years and earn 6% annually in all other years. The only difference? **Timing**.

One investor faces the decline in years one and two—right at the start of retirement. The other faces it in years 10 and 11. After 18 years, the early-loss investor has **depleted the entire portfolio**. The late-loss investor finishes with a balance near **$400,000**.

Same portfolio. Same returns. Different timing. And a $400,000 difference in outcomes.

Why does this happen? Because withdrawals during a downturn force retirees to sell shares at depressed prices. Those shares are permanently gone. They can't participate in the eventual recovery. And the damage compounds over decades.

This is the trap that flat-budget planning ignores.

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## The Retirement Spending Curve: Smile or Smirk?

So if spending doesn't stay flat, what does it actually do?

David Blanchett, Head of Retirement Research at Prudential Financial, has spent years studying this question. His research, published in the *Financial Planning Review* in June 2026, found something fascinating.

Using data from the RAND Corporation's Health and Retirement Study, Blanchett found that **average** retiree spending follows a U-shaped "smile." Spending is high in the early years, dips in the middle, and rises again in the late years as healthcare costs surge.

But **median** spending tells a different story. It follows a "smirk"—declining over time without the late-life uptick. Why the difference? Because healthcare shocks don't hit the median retiree. They hit a minority of retirees very hard. Those outliers pull the average spending back up, creating the smile.

Blanchett's conclusion: "Spending tends to decline in real terms, even among those who have the resources to potentially spend more".

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## The Three Phases: Go-Go, Slow-Go, No-Go

Financial advisor Michael Stein popularized the three phases behind the spending curve, and they're worth understanding because they explain *why* spending changes.

**The Go-Go Years (roughly ages 65 to 75).** This is early retirement, when you're healthy and active. You travel. You pursue hobbies. You take the grandkids on trips. This is the highest-spending phase of retirement. Some research suggests early-retirement spending can run **10% to 20% above** a retiree's former working-age baseline, at least for the first few years.

**The Slow-Go Years (roughly ages 75 to 85).** Activity levels decline. You take fewer big trips. You travel less, so your cars last longer. Discretionary costs fall, pulling total spending well below the early-retirement baseline.

**The No-Go Years (ages 85 and beyond).** Material spending drops—you're not buying new furniture or taking cruises. But medical costs surge. Fidelity estimates that a 65-year-old retiring in 2026 can expect to spend **$185,500** on healthcare over the course of retirement. That's up 7.5% from the prior year's estimate.

The go-go and slow-go phases are the reason flat-budget planning fails. Most retirees spend *more* than their models predict in the early years, *less* in the middle, and then face a healthcare spike that their plans never accounted for.

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## The Math: You Can Probably Spend More

Here's the part that should make every cautious retiree sit up straight.

Blanchett tested three spending models—flat, smile, and smirk—and assumed a moderate level of income risk aversion. Both the smile and smirk models supported **initial withdrawal rates roughly 20% higher** than the flat-line assumption.

For a retiree with a $1 million portfolio, that gap translates to roughly **$10,000 to $12,000 in additional first-year spending** from the same savings.

Christine Benz, Morningstar's Director of Personal Finance, reached a similar conclusion from a different angle. "Don't just take that 3.9% and run with it," she said, referring to Morningstar's baseline safe withdrawal rate. "You probably can and should enlarge your spending if you are willing to be flexible".

The key word is **flexible**.

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## The Bucket Strategy: Time, Not Immunity

Schwab recommends organizing retirement savings into three time-based buckets to give the portfolio room to recover without forcing equity sales during downturns.

**Bucket 1: One year of living expenses in cash.** After accounting for Social Security and other guaranteed income, hold enough cash to cover one year of expenses.

**Bucket 2: Two to four years of expenses in short-term bonds or CDs.** These are designed to retain value during downturns.

**Bucket 3: The remainder in stocks and higher-yielding instruments.** This is where growth happens, extending savings across a retirement that may last 25 to 30 years.

The bucket structure buys time. But here's the catch: time alone doesn't fix the problem. Schwab's own research shows that an investor who cuts withdrawals to **2%** after a 15% early decline recovers the starting balance within about **11.5 years** of 6% annual returns. But at a **4% withdrawal rate** under the same conditions, full recovery requires **28 uninterrupted years** of 6% growth.

That's longer than most retirements.

The bucket strategy works, but only if you're willing to **adjust your spending downward** after a downturn. The cash and bonds cover the gap while you wait. But you can't keep spending at the same rate and expect the math to work.

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## The Healthcare Wildcard

Blanchett acknowledged that healthcare expenses remain a "clear wildcard" when projecting income needs during the final stretch of retirement.

The numbers are sobering. A 65-year-old retiring in 2026 can expect to spend **$185,500** on healthcare over the full span of retirement. That's an average. For those who live longer or face serious health issues, the costs can be far higher.

Among retirees who passed away at age 95, median cumulative unexpected out-of-pocket medical expenses were about **$50,000**. But at the 95th percentile—the highest one in twenty—those expenses reached roughly **$250,000**.

Shannon Benton, Executive Director of The Senior Citizens League, has warned that Medicare Part B premiums consistently outpace Social Security cost-of-living adjustments. The gap gradually erodes seniors' quality of life, with members reporting that their benefits are failing to keep up.

This is why the late-life uptick in the spending smile exists. It's not that retirees suddenly decide to spend more. It's that they're forced to.

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## Why Retirees Underspend: The Psychology of Fear

If the math says you can spend more, why don't retirees do it?

Blanchett calls it one of the biggest reasons retirees underspend: **longevity risk**. People worry about running out of money, so they end up being overly cautious. The result is that many retirees die with more wealth than they had when they first retired.

Research from the Health and Retirement Study found that **75% of households** reduce real spending during the first 10 years of retirement, with a median annual decline of approximately **2% per year**. The percentage of households that can fund their retirement consumption increases dramatically during that period—from **18% to 48%**—primarily because they're spending less, not because they have more.

Blanchett and Finke found something else that's revealing. Retirees spend differently depending on the *source* of the money. They spend roughly **80% of their lifetime income** (Social Security, pensions, annuities). But they spend **less than half** of their wage income and capital income. And they spend just **2% of their savings**—half of the commonly cited 4% rule.

"Unless people purposefully want to leave behind a large bequest when they die, many retirees are denying themselves the opportunity to enjoy life by spending more of their savings," Blanchett said.

Finke added: "I don't think people purposefully want to hoard their savings; they are just finding it difficult to view savings as a potential form of retirement income".

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## What This Means for You

So what should you actually do with this information?

**First, recognize that flat-budget planning is probably wrong for you.** If your plan assumes you'll spend the same inflation-adjusted amount every year, it's not reflecting reality. Spending declines in real terms for most retirees, even wealthy ones.

**Second, plan for the three phases.** Higher spending in the go-go years. Lower spending in the slow-go years. And a dedicated reserve for the healthcare costs that will hit in the no-go years. This structure can support a **higher starting withdrawal rate** than flat planning allows.

**Third, don't obsess over the 4% rule.** Schwab's research identifies six problems with the traditional formula, including its rigidity, its reliance on historical returns, and its failure to account for taxes and fees. The firm recommends targeting a confidence level between **75% and 90%** rather than near-100%, which allows for more spending.

**Fourth, use the bucket strategy—but be willing to adjust.** The cash and bond buckets buy you time during a downturn. But you have to be willing to cut spending when markets fall. The math only works if you do.

**Fifth, consider converting some savings into lifetime income.** Blanchett's research shows that retirees spend lifetime income (Social Security, pensions, annuities) far more freely than they spend savings. Converting a portion of your portfolio into an income stream could help you get past the psychological barrier that's keeping you from enjoying your money.

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## The Bottom Line: The Math That Fails You

The 4% rule was never meant to be a rigid prescription. It was a guideline, a starting point, a worst-case scenario. But somewhere along the way, it became a rule—and that rule has convinced millions of retirees to spend less than they can afford.

Schwab's warning is simple: spending changes. It doesn't stay flat. And if you plan for a straight line, you'll either underspend and miss out on the retirement you worked for, or you'll overspend and run out of money when you need it most.

The good news is that the math is on your side. If you're willing to be flexible—to spend more in the go-go years, less in the slow-go years, and reserve a cushion for the no-go years—you can probably spend **20% more** than your flat-budget plan suggests.

That's not just a number. That's a trip you've been putting off. A hobby you've been meaning to start. Time with the people you love.

As Blanchett put it: "Retirement is incredibly complex and incredibly personal. The retirement plan that will work best for you is one that's tailored to your personal life circumstances".

The math you trust most may be the math that fails you. But the alternative—flexible, realistic, personalized planning—can set you free.

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## Frequently Asked Questions (FAQs)

### 1. What is sequence-of-returns risk and why does it matter?

Sequence-of-returns risk is the danger that a market downturn early in retirement can permanently damage your portfolio. Withdrawals during a downturn force you to sell shares at depressed prices, reducing the assets available for recovery. Schwab's research shows two retirees with identical portfolios and returns can end up **$400,000 apart** depending on when a decline hits.

### 2. What is the retirement spending smile?

The spending smile is the U-shaped pattern that **average** retiree spending follows. Spending is high in early retirement (the "go-go" years), dips in the middle (the "slow-go" years), and rises again in late retirement (the "no-go" years) as healthcare costs surge. For the **median** retiree, spending follows a "smirk"—declining over time without the late-life uptick.

### 3. Can I really spend more than the 4% rule suggests?

According to Blanchett's research, yes. Both the smile and smirk spending models supported initial withdrawal rates roughly **20% higher** than the flat-line assumption. For a $1 million portfolio, that's **$10,000 to $12,000 more** in first-year spending. However, this only works if you're flexible and willing to adjust spending downward after market declines.

### 4. What is the bucket strategy?

The bucket strategy organizes retirement savings into three time-based categories. Bucket 1 holds one year of expenses in cash. Bucket 2 holds two to four years of expenses in short-term bonds or CDs. Bucket 3 holds the remainder in stocks for growth. This structure gives the portfolio time to recover without forcing equity sales during downturns.

### 5. Why do retirees underspend?

The primary reason is **longevity risk**—the fear of running out of money. Research shows 75% of households reduce real spending during the first 10 years of retirement. Many retirees die with more wealth than they had when they retired. Blanchett and Finke found retirees spend only **2% of their savings** annually, half of the 4% rule, because they find it difficult to view savings as income.

### 6. How much should I budget for healthcare in retirement?

Fidelity estimates a 65-year-old retiring in 2026 can expect to spend **$185,500** on healthcare and medical costs over the full span of retirement. That's up 7.5% from the prior year. For those who live longer or face serious health issues, costs can be much higher—at the 95th percentile, cumulative unexpected medical expenses for those who die at 95 reach roughly **$250,000**.

### 7. What is the "go-go, slow-go, no-go" framework?

It's a way to think about the three phases of retirement spending. The "go-go" years (roughly 65-75) are the highest-spending phase, when retirees are active and travel. The "slow-go" years (roughly 75-85) see declining activity and discretionary spending. The "no-go" years (85+) see material spending drop but medical costs surge.

### 8. Should I use a flat spending assumption in my retirement plan?

Schwab's research suggests no. Flat-budget planning misses both the early-period uplift and the late-period healthcare spike. A model that explicitly accounts for the three phases—higher spending early, reduced spending in the middle, and a dedicated care reserve for late retirement—produces a more accurate picture and can support a higher starting withdrawal rate.

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## Disclaimer

*This article is for informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. The views expressed are based on publicly available research from Charles Schwab, Prudential Financial, the Financial Planning Review, and other cited sources as of September 2026. Retirement planning involves significant personal and financial decisions that vary widely based on individual circumstances. Withdrawal rates, spending patterns, and healthcare costs are estimates that may not reflect your specific situation. Past performance is not indicative of future results. Before making any financial or retirement decisions based on the content of this article, please consult with qualified professionals who can evaluate your specific circumstances.*