There is a “shocking” amount of volatility in retirees’ spending patterns that makes post-retirement income planning fraught with danger. This is the key conclusion from analysis of comprehensive financial data from millions of US households.

Speaking at Investment Magazine’s Post Retirement Conference in Sydney in March, JP Morgan Asset Management managing director, portfolio manager and head of retirement solutions, Anne Lester, said it was important to understand what members do, “not what we think they do”.

To do this, Lester’s US-based team, which includes those focusing on big data and meta-analysis along with financial planning, analysed what she calls “an incredibly rich set of data”.

She said the data set was so rewarding because JPMorgan Chase had a banking relationship with half of all American households, through credit cards, auto loans, mortgages, and checking accounts.

“We have 5.5 million households where we think we understand all of their spending,” she said.

When Lester’s team compared what people spent in the year before they retired with the years afterward, the findings were astounding.

“When we looked to see how much stability of spending there is, we were shocked – absolutely shocked,” she said.

JP Morgan defined stability in post-retirement spending as plus or minus 20 per cent of pre-retirement spending. Even within this broad definition, only 22 per cent of the people surveyed stayed within those boundaries for three years after retirement. Of all the households surveyed, 56 per cent were experiencing volatility.

This meant it was “a dangerous assumption” to use averages as the basis for post-retirement financial planning, Lester said.

Although the most populated range is 30 per cent less to 25 per cent more than the median, there was also what she called “a long tail” on the right-hand side of the median (those spending more in the year after retirement) with “some big spenders”.

Lester said that, rather than look at averages, it was a better idea to model outcomes based on what JP Morgan calls “the edges”.

“We’re designing for the edges of behaviour,” she said. “Whether you want to pick the 10th and 90th [percentiles or] whether you want to pick the 75th and 25th [percentiles] of the distribution, you need to understand…where those edges are.

“So one of the things we’re doing a lot of work on is: How do we help individuals, employers, and financial advisers get this notion of ‘edge design’ in?

“To me, it’s a complicated problem. It is, in fact, unsolvable. But what we can do is give people a little better idea about what some of the sensitivities are…and hopefully help them save a little bit more money, which is about the only thing you can do to help guard yourself against some of these [adverse] outcomes.

“We believe if you build and design products based on that, you will end up with members who are much less likely to be disappointed at the end of this journey.”

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