Financial models generally assume stable spending in retirement, but research suggests that spending actually declines over time.
According to a new working paper by Susann Rohwedder, senior economist at the RAND Corporation and associate director of the RAND Center for the Study of Aging, and co-authors Michael D. Hurd and Péter Hudomiet.
Their findings have implications for retirement planning.
“The general trend is a drop in spending across all socio-economic groups,” Rohwedder said. “The household situation changes a bit during retirement.”
Over time, people can lose a spouse or end up in poor health, factors that tend to make activities like traveling, dining out and buying new cars less fun than before, found Researchers. The analysis was based on data from the long-running, large-scale University of Michigan Health and Retirement Study and Consumer Expenditure Survey that was conducted among a sub- all of these participants, both funded by the National Institute on Aging and Social Security. Administration.
While for most respondents less enjoyment of certain types of expenses, such as leisure and travel, was linked to poorer health, for some (between 10% and 20%), financial constraints also played a role. However, the percentage of people reporting financial hardship is lower at older ages, suggesting that the observed declines in overall spending are not due to people becoming increasingly financially strained over time.
Leisure and travel spending make up about 5% of people’s budget in their late 50s, then decline to about 3% for people aged 85 and over, the researchers found. Spending on transportation (mostly automobile-related) has declined from about 21% of total spending in your late 50s to about 10% at age 85+. On the other hand, health expenditure is increasing from 8% of the budget of people in their late fifties to around 15% for retirees aged 85 and over.
In general, increases in health care spending are not enough to offset falling spending in various other spending categories (transportation, clothing, recreation, travel, and vacations) as people age, so spending declines overall .
(One caveat, Rohwedder noted, is that consumer expenditure data might not include acute medical expenditures near the very end of life. Although such expenditures are well represented in other parts of the study on health and retirement, they are not easily integrated with the expenditure data analyzed in the working paper, she said.)
Traditional financial advice advises savers to plan to replace a certain percentage, often around 80%, of their working income in retirement. When that time comes, 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 conventional wisdom. . This estimate then informs your goals of how much to save.
Yet in your early years of retirement, you could easily spend more than 100% of your working income enjoying more travel and other leisure activities. Then, when you start to slow down, your expenses often go down.
Rohwedder said she noted years ago that people’s financial giving and giving as a percentage of total spending tended to increase with age. It wouldn’t happen if people were struggling to make ends meet, so she wanted to dig deeper, she said. “Everyone worries about running out of money, but then it happens,” she said. While some people struggle financially later in life, the fact that many don’t might reassure pre-retirees about the many uncertainties of retirement planning.
Dave Boniface, financial adviser at Legacy Capital Wealth Management in Forest Lake, Minnesota, advises clients to plan to spend about 100% of their working income throughout retirement, if possible. Then, if they end up spending less later on, they will have more money for possible acute health needs later in life or more to give to their heirs.
Boniface has seen many clients slow down as they get older, but her mother defies the typical pattern. Now 79 and a widow, she currently stays in youth hostels as she wanders around Europe. “I can’t follow her,” he said.
Write to Elizabeth O’Brien at [email protected]