Good News for Retirees: Spending Declines Over Time

Financial models often assume stable retirement expenditure, but evidence reveals that expenditure decrease over time. Susann Rohwedder (the senior economist at the RAND Corporation) and her co-authors Michael D. Hurd and P├ęter Hudomiet note that retirees are less interested in leisure activities such as eating out and traveling, having financial difficulties, and having to cut back.

Their findings are relevant to retirement planning.

The overall trend is a decrease in expenditure across all socioeconomic classes, Rohwedder explained. Household arrangements alter a lot with retirement. According to experts, people may lose a spouse or have declining health as they age, making traveling, dining out, and purchasing new automobiles less enjoyable than they once were. The study included data from the large-scale, long-running University of Michigan Health and Retirement Study and a survey on consumer expenditure sent to a subset of participants, financed by the National Institute on Aging and the Social Security Administration.

While gaining less satisfaction from various sorts of expenditure, such as leisure and travel, was associated with poor health for most respondents, financial restrictions also played a role for some (between 10% and 20%). However, at advanced ages, the percentage of persons experiencing financial difficulty is smaller, suggesting that the drops in general expenditure aren’t being driven by people getting more financially stressed over time.

Leisure and travel expenditures account for roughly 5% of individuals’ budgets in their late 50s. According to the study, that number drops to about 3% for persons 85 and older. Transportation spending (mainly car-related) fell from around 21% of total expenditures in people’s late 50s to roughly 10% by age 85 and up. On the other hand, health spending rises from 8% of people’s budgets in their late 50s to almost 15% for retirees aged 85 and beyond.

In general, the rise in health expenditure is insufficient to counterbalance the reduction in other spending categories (transportation, clothes, leisure, vacations, and vacation) as individuals age. Therefore overall spending falls. (One limitation, according to Rohwedder, is that consumer expenditure statistics may not cover acute medical expenses near the end of life.) While those expenditures are adequately represented in other portions of the Health and Retirement Study, she says they are difficult to combine with the spending data examined in the working paper.

Traditional financial advice advises people to prepare to replace a particular proportion of their working income in retirement, often around 80%. When that time arrives, you won’t be spending money on work-related activities like commuting, and you won’t be saving for retirement, so you won’t need as much to live on, according to popular thought. This estimate will then guide your savings goals.

However, you may easily spend more than 100% of your working income in your early retirement years on travel and other leisure activities. Then, when you begin to slow down, your spending often decreases.

Rohwedder recognized years ago that cash gifts and donations as a percentage of overall spending tended to rise with age. She reasoned that that wouldn’t happen if people struggled to make ends meet, so she dug deeper. Everyone is worried about running out of money, but then something like this happens,” she explained. While some people might endure financial hardship in later life, the fact that many do not may provide comfort to pre-retirees among the numerous uncertainties of retirement preparation.

Dave Boniface, a financial advisor at Legacy Capital Wealth Management in Forest Lake, Minn., advises clients to spend around 100% of their working income in retirement if possible. Then, if they wind up spending less later in life, they’ll have more money for probable future acute health requirements or to leave to their heirs. It is common for Boniface’s clients to slow down as they age, but his mother defies the norm. She is now 79 and widowed, hiking her way around Europe in hostels. “I’m not keeping up with her,” he said.