According to research by the Institute for Fiscal Studies, individuals and couples aged 62 to 80 spend more in retirement, disproving the belief that spending decreases with age.
The institute’s study on how spending changes in retirement sheds insight on early retirement spending patterns and refutes the premise that as people age, their spending will reduce.
On average, retirees’ total household spending per person remains relatively steady in real terms during retirement, growing slightly up to age 80 and remaining flat or dropping after that.
Spending rises for people aged 62 to 80
While total spending appears to fall drastically with age, when birth cohort differences are considered by looking at variations within each generation, the link between age and spending seems to be flat or even slightly increasing in some cases.
The IFS discovered considerable disparities in spending between five-year cohorts, especially between those born in 1934-38, 1939-43, and 1944-48, showing the necessity of accounting for generational changes when looking at age profiles of spending.
For people born in 1939-43, the average weekly spending at age 67 was $291, rising to $313 at age 75 – just under 1% a year or 7% when adjusted for inflation.
Individuals born in 1924-28 spent $234 a week at age 82, declining 6% to $220 at age 88, or 1% per year.
Holiday spending increases then decreases in the mid-eighties
Some costs diminish during retirement, but others rise because spending patterns change as people grow older.
Per-person spending on meals at home falls when appetite declines with age, possibly due to diminished activity or illness.
Spending on eating outside the home grows in retirement and declines when people reach their 80s. Spending on cars, alcohol, and tobacco decreases in retirement.
Holiday expenditures rise until the early 80s and start declining in the mid-80s, whereas motoring costs fall rapidly from the late-70s as people drive less.
The IFS reported that 57% of 82-year-olds born in the years 1924-28 spend money on automobiles and 19% on vacations.
The younger group spends 83% on vehicles and 41% on vacations. The IFS discovered noteworthy age patterns in these two retirement spending categories, which take up a relatively significant portion of spending in early retirement.
The estimated increase in vacation expenditure is considerable: $13.60 per week on average from ages 65 to 80.
Later-born generations usually spend more on leisure and vacations in retirement. These account for 7% of total spending for 65-year-olds born in the years 1924-28 and 11% for the years 1944-48.
The IFS stated this could mean younger and future retirees’ expenditures will grow faster with age than is the case for current retirees.
Increasing household costs in later years
The IFS estimates that people between the ages of 75 and 85 spend $6.70 more each week on household expenses and services.
Andrew Tully, Technical Director at Canada Life, said it’s disturbing that bill expenditure seems to rise after age 75, maybe reflecting the death of a partner and being unable to share household costs.
Becky O’Connor, Head of Pensions and Savings at Interactive Investor, suggested that consumers may assume they won’t spend as much in their 70s and 80s, which turns out to be false.
People think they won’t go out as much or take as many vacations. Even if that’s accurate, unexpected spending requirements can break the budget later in life. If people spend more as they age, they may deplete their pensions too soon.
The IFS also observed disparities in spending patterns among various types of households.
Above-average-income households spend more in their 60s and 70s and less in their 80s.
Increasing salaries imply more people save as they age, the study found. For instance, for individuals born in the years 1939-43, 59% saved at age 67, but that increased to 69% at age 75.
Given that the state pension tends to increase faster than prices, a falling profile of private income may be desirable, especially for people who rely more on the state pension, the IFS stated.
Non-index-linked annuities render people more vulnerable to inflation if they rely on private pension income.
The IFS noted that the death of one partner affects the surviving partner’s spending because shared costs like housing don’t decrease.
The institute cautioned households to assess how such changes will influence income and spending to ensure they have enough resources to cover per-person spending increases.
Future retirees, who are less likely to receive occupational or state pensions with a survivor’s benefit, will have to consider this while selecting drawdown pace and whether to get an annuity with a survivor’s benefit.
That’s crucial given the cost-of-living crisis and inflation. With the cost-of-living situation in everyone’s mind, individuals on fixed incomes, like pensioners, will have fewer levers to pull.
Many who need to are tightening their belts, cutting energy usage, eating out less, and adjusting buying habits, and this will only get worse as inflation rises over the year.
Contact Information:Email: mackhales@bellsouth.netPhone: 7705402211Bio: Mack Hales has spent the past 4 decades helping clients prepare for retirement and manage their finances successfully. He also works with strategies that help clients put away much more money for their retirement than they could in an IRA or even a 401k. We involve the client’s CPA and/or their tax attorney to be sure the programs meet the proper tax codes.
Mack works with Federal Employees to help them establish the right path before and after retirement. The goal is to help the client retire worry-free with as much tax-free income as possible and no worries about money at risk of market loss during retirement.
Mack has resided in Gainesville, GA since 1983, so this is considered home. Mack is married to his wife of 51 years, has two boys and five grandchildren.Disclosure: Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.
