A big but oft-overlooked question for aspiring retirees is: “Will my spending decline in retirement?” If the answer is yes, then you could retire sooner than you think, or you could spend more money in the early years after your own freedom day.
As it happens, there’s a large stack of research that suggests people really do see their spending decline in retirement. At least on average.
And if this turns out to be you, then the amount you need to retire [1] should be less daunting than previously advertised. You can even afford to decrease your ‘how much should I put in my pension [2]’ target figure.
That’s because sustainable withdrawal rate [3] (SWR) strategies allow for constant inflation-adjusted spending in retirement.
They assume you want to maintain your purchasing power for the remainder of your days. That sounds reasonable.
But the evidence suggests the majority of retirees actually keep saving as their spending needs fall. The net effect is they beat inflation and do better financially than predicted by overly-cautious retirement planners.
[4]
So what’s the evidence for the spending decline in retirement?
That’s a 64 million dollar question. (Okay, more like £6.40 in my case).
UK evidence that spending declines in retirement
I’m going to focus on a UK research paper called Understanding retirement journeys [5]: expectations vs reality.
It was authored by Cesira Urzi Brancati, Brian Beach, Ben Franklin, and Matthew Jones for the International Longevity Centre UK (ILCUK).
The ILCUK is a think tank concerned with the social impact of an aging population.
This paper is based on longitudinal [6] data of households in the UK and England. Brancati and co find the majority of these households experience a real decline in retirement spending:
Our findings suggest that typical consumption in retirement does not follow a U-shaped path – consumption does not dramatically rise at the start of retirement or pick up towards the end of life to meet long-term care-related expenditures.
[…] the inescapable truth is that, regardless of the period analysed, lifestyle or income level, older people in the UK spend less than their younger counterparts, with discretionary spending on life’s luxuries all but disappearing from age 75 and almost all cohorts progressively saving more of their income as they become older.
The findings apply on average to broad populations. Please bear this in mind from here. That way I won’t need to clog up every sentence with words like ‘average’ and ‘typically’.
Also, I don’t want to ruin your day by making you read methodology spoilers. A full discussion on data sources and research parameters is available in each linked paper.
The retiree spending decline headlines
The paper paints a vivid picture of decline:
- Eighty-something year-old households spend an average 43% less than fifty-something households.
- Spending on holidays, eating out, and recreation declines along with other non-essentials.
- Essential items such as food, health, and housing eat up more of the budget.
- Savings increase as the drop in discretionary spending dominates stable non-discretionary outlays.
The research also analyses behavioural surveys. This helps to connect the dots revealed by the expenditure data:
• Time at home alone increases by age, while time spent with family and friends falls. By age 90+, watching television and spending time at home alone are the most common daily activities.
• The age group 70-74 appears to be a tipping point. From this age, the average amount of time spent at home alone increases markedly, while the time spent with family and/or friends falls.
We’ll explore the obvious and not-so-obvious reasons why this is so, shortly.
An immediate question is: does the fall in non-essential spending apply mainly to the affluent?
This graph shows that the retirement spending decline affects low-earners and top-earners alike:
[7]Bottom-earners (blue line) spend proportionally more than their income past age 65, but then their savings rate accelerates.
Top-earners (red line) always have the capacity to save. But again, their spending arc bends increasingly downwards.
Brancati notes:
This pattern is common to both high and low income groups, is robust to the inclusion of factors other than age, and is not simply the result of the time period in which the data was collected. Subsequently, households make substantial savings in later life.
Choose your retirement tribe
Obviously there isn’t a generic lump of retirees that all behave alike. But Brancati identifies five sub-groups, and all see the same pattern:
[8]Find out who these people are on pages 29 to 33 of Brancati’s paper.
In short:
Transport Lovers and Extravagant Couples are described as high income. Both spend freely on non-essentials. Extravagant Couples even go into hock during their early retirement.
Prudent Families have ‘relatively high income’ but are predisposed to save.
Frugal Foodies are low income, spend little on non-essentials, and are diligent about saving. I estimate their annual household income to be around £19,000 at today’s prices (based on the report’s 2013 numbers).
Just Getting By are also low income and are unlikely to own their own home or investments. They’re disproportionately affected by rising rent and energy prices. They start to save from age 75 nonetheless.
What happens to retirees?
The go-to rationale is that fading health cages older retirees. However that’s only part of the answer.
And the notion of people cutting back because of dwindling financial resources is confounded by this graph:
[9]A majority feel more secure about their finances as they age, not less.
That’s the good news part of the story.
Meanwhile, spending on essentials (food, housing, clothing, and health) remains relatively stable:
[10]The exception that proves the rule is transport. People spend less on this when they leave the workforce and stop commuting. Recreational travel wanes, too.
Notice how gently the health line (in blue-grey) rises at the end. As if wafted by an ill-wind…
In contrast, non-essential spending goes into steep decline long before that – from 65:
[11]Spending on eating out, hotel stays, and even alcohol take a 50% or greater hit from their peaks.
What about the Lamborghini factor [12]?
Brancati says there’s not much evidence for a post-retirement day blowout:
A closer look at the different categories of non-essential spending reveals that people spend a relatively similar amount of money on recreational goods and services between the age of 50 and 65, and only then do they start spending progressively less.
This seems to contradict the stereotypical image of retirees splurging in the immediate post-retirement phase of life, going on cruises and spending all their hard-earned cash on fun activities.
I do know retirees who’ve gone splurging. I have to remind myself to focus on the overall trend and not my own anecdotal evidence.
Particularly troubling though is the dipping purple recreational curve from age 65 on.
That slump is a warning that the ‘active’ years of retirement may be short.
This graph plots that story, and it bothers me the most:
[13]The steepening curves reveal that age 70-74 tipping point I quoted earlier.
Spending time home alone climbs relentlessly. Brancati puts it in stark terms:
Time at home alone rises from 3.5 hours a day for those aged 70-74 to more than nine hours a day by age 90+.
Conversely, time with family or friends falls. I guess that’s partly because funerals become all-too frequent.
Also notice the big drop in walking and other exercise.
In contrast, time spent on ominous-sounding ‘health-related activities’ marches upwards. This is an ill-defined category, but Brancati says it likely involves visits to the doctor and other medical facilities.
Why then, does the line subside from age 85 to 89?
The decline after this age group may simply relate to longevity factors, i.e. healthier people or those with fewer health issues are the ones who survive to this age.
Explaining the retirement spending decline
Wondering whatever happened to the likely lads (and lasses) to keep them home alone? Here’s the money shot:
[14]From age 50 to 64, the number of people who often or sometimes agree that their health stops them doing what they want hovers in and around 30%.
By 70 to 74 that proportion rises to over half.
And for the over-Nineties, 84.5% of them agree their health limits their lifestyle often or sometimes.
But health isn’t the only reason that time spent at home increases.
Other factors with explanatory power include losing your partner (and not being partnered at all), being male, being part of a small household, and not being a carer for someone.
Inevitably, our advancing infirmity changes us. In Brancati’s words:
The anticipation of ill health and disability may also increase the desire to save in order to help meet potential health and long-term care costs in later life.
She also believes a desire to leave an inheritance contributes to waning spending.
Some other studies [15] conclude the decline is mainly explained by falling work-related expenses, the substitution of time for spending, and involuntary early retirement.
Forced retirement is largely due to health shocks. It especially affects low income groups.
Finally, there’s an interesting snippet in a US piece [16] that claims retirees cannily neglect home maintenance later in life. Such slapdashery enables retirees to pile up savings to offset their uncertainty over life expectancy and future income.
But will my spending decline in retirement?
My two big questions about this research are:
- How reliable is it?
- What practical use can we make of it?
I’ll have to dig into those questions in my part two [17] – otherwise, this article would be unreadably long again. (Oops, too late for that!)
Take it steady,
The Accumulator