How do you think your spending will change in retirement? Will it increase? Will it decrease? Or will it stay the same?
When it comes to retirement planning, investors are often advised that they’ll most likely spend considerably less in retirement than they do during their working years.
After all, lots of expenses will be gone at that point. They’ll have (hopefully) paid off their mortgage, they’ll no longer be raising kids, etc.
Others have, however, argued that spending will increase, perhaps substantially, in retirement. After all, many retirees want to enjoy the finer things in life, lavish gifts on their grandchildren, etc. And, ultimately, they’ll have medical expenses.
So who’s right? Will your spending increase, decrease, or remain the same in retirement? Instead of relying on ad hoc arguments, I thought it would be worth looking at actual data. And so that’s our task for today…
Thanks to our friends at the BLS and the Census Bureau, we have something called the Consumer Expenditure Survey at our disposal. As a result, there’s a ton of data available on average spending patterns vs. a variety of demographic factors.
Before we go any further, please keep in mind that the numbers below represent broad averages for a hypothetical “reference person.” Thus, you shouldn’t put too much stock in any particular value. But the overall patterns are quite interesting.
Note that this is all based on data from the 2012 Consumer Expenditure Survey, which is the most recent version available. It was released in the Fall of 2013.
For starters, let’s take a look at housing arrangements as a function of age.
Sure enough, an increasing fraction of renters turn into homeowners over time, and those homeowners gradually pay off their mortgages. We might thus expect housing costs to decline over time and, indeed, they do.
Next up, let’s consider discretionary spending. I’m thinking here of things like entertainment expenses and the costs associated with dining out.
These data also follow a somewhat expected pattern, with spending increasing into middle age and decreasing thereafter.
Healthcare and cash contributions
I’m not sure about you, but I would’ve expected both of these to increase over time, and they do. In the case of healthcare expenses, the increase is both dramatic and consistent, though it levels off at the end.
Overall income vs. expenditures
And, finally, what happens when you put everything together? Keep in mind that I just cherry-picked a handful of things above and ignored the rest, so we weren’t getting a very complete picture.
We can learn a few things from this graph. First, income follows a familiar trend, increasing through middle age and then falling off into retirement.
Second, spending likewise increases into middle age and then falls off as you move into retirement. In fact, the value from the traditional retirement age onward (i.e., 65+) is roughly 70-75% of the decade preceding retirement, and ca. 65% of the peak earnings period.
As an aside, once you reach retirement, you’ll no longer need to be saving for retirement. This erases a major “expense,” making your money go further than it used to — though this sort of thing isn’t captured in the survey.
Why the change?
Now, we should probably consider why spending decreases in retirement. Does spending naturally fall as you age? Perhaps. Again, housing expense typically fall away, you no longer have commuting and other work-related expenses, etc.
Or is it the case that spending decreases in retirement simply as a byproduct of poor savings habits earlier in life. In other words, are people just spending less because they have less to spend?
The poor savings explanation would impact this in two ways. First, if people had saved more earlier in their life, they would’ve necessarily spent less during those years. Second, having saved more early on, their spending wouldn’t have to drop — or at least not as dramatically — to continue making ends meet.
I’m not sure, but I suspect that both factors are at work. And while I can’t offer a clear answer, I can offer a couple of personal observations on the matter.
For starters, when looking at my own parents, I can say that their spending definitely declined as they aged. And this wasn’t a byproduct of limited resources. They’re actually quite comfortable, they just don’t spend a whole lot of money.
They’ve long since paid off their mortgage, they don’t have expensive hobbies, and they’ve always associated with like-minded (fairly frugal) people. Yes, they eventually started outsourcing certain tasks (e.g., lawncare) but those expenses were more than offset by reduced spending in other areas.
However… They’ve recently transitioned into assisted living, which is quite expensive. And if it weren’t for their excellent long-term care (LTC) policies, their living expenses would have skyrocketed.
So while their spending seemingly decreased early through the early(ish) parts of retirement, it could have exploded later on if they hadn’t planned ahead.
Then again, had they not planned ahead (in terms of both retirement savings and LTC coverage), Medicaid would have ultimately kicked in and covered the costs of their care. In that case, they wouldn’t be spending much of their own money, but their care would still be quite costly.