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Typical retirement planning paradigms suggest that our annual retirement spending remains consistent, merely adjusting for inflation affecting living costs, travel, dining out, and the like.
However, is this an accurate depiction of reality?
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A recent analysis conducted by the RAND Corporation looked into the expenditure trends of elderly Americans who participated in the Health and Retirement Survey run by the University of Michigan. The study observed a yearly decline of approximately 1.7% in the real spending of single retirees post-65, and a slightly higher 2.4% drop for retirement households.
There might be several reasons for this spending reduction.
One could speculate that living expenses become less manageable as people age. However, the research discounted this factor as they discovered that even the richest survey participants exhibited similar expenditure decline as those possessing less wealth.
Interestingly, they observed an upward trend in the proportion of budget allocated towards gifts and donations as retirees aged, across all wealth brackets.
A more plausible reasoning, suggested but not yet substantiated by the study, is that retirees in their younger years (60s and early 70s) have more energy and are therefore more likely to dine out and travel. As they get older, they might lose interest in high-end goods like new vehicles and fashionable clothing.
The yearly expenditure for the median retiree household aged 65-69 was noted as $28,505 (single) or $53,990 (couple), whereas those in their 80s spent $26,094 and $38,885 respectively.
Naturally, these figures varied significantly as retirees have different lifestyle preferences, some extravagant and others modest. The breakdown of expenses revealed a significant drop in travel and leisure costs with age, while healthcare expenses remained fairly consistent, particularly for couples.
In all age groups, housing consumed the largest part of the budget (23-25%), followed by food (16-19%) and utilities (12-17%).
Contrary to popular belief that health expenses increase substantially with age, this study revealed that healthcare outlay was relatively stable. Reference was made to a previous study that highlighted an average out-of-pocket cost of $6,800 for medical services during the last year of life for most individuals.
In fact, households of people over 80 spent an average of just 14% on healthcare, compared to 9.4% for the youngest retirees. A minor segment, about 10% of the sample, accounted for a whopping 42% of out-of-pocket healthcare expenditure in the twilight years—a potential risk that could be mitigated by investing in long-term care insurance.
In conclusion, traditional models of retirement spending, which assume a constant expenditure rate adjusted for inflation, may not hold true in real-life scenarios. Research indicates a trend towards declining spending in retirement, irrespective of wealth levels, with changing preferences and lifestyles likely playing a part.
Interestingly, contrary to common belief, healthcare costs remain relatively stable for most retirees, except for a small proportion who might benefit from long-term care insurance. These insights can significantly influence retirement planning strategies, encouraging a shift from conventional paradigms towards models that consider the dynamic nature of expenditure and lifestyle changes in the golden years.
Talk to a financial advisor to help you navigate your retirement planning.
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Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.