Amid high inflation, survey finds retirees spending more than they can afford

With inflation at an all-time high, consumers from all walks of life are finding it difficult to make ends meet – and retirees are no exception as a recent survey found that many are spending more in 2022 than they can afford.

The 2022 Spending in Retirement Survey from the Employee Benefit Research Institute (EBRI) found that retirees are spending much higher or a little higher than they can afford in 2022 (17% in 2020 vs 27% in 2022). Black and Hispanic retirees, as well as those in the lower annual household income brackets and poor self-reported health status, also indicated that their spending is higher than they can afford.

“The 2022 Spending in Retirement Survey reveals that certain measures of retiree wellbeing have stagnated or declined since the pandemic,” explained Bridget Bearden, research and development strategist, EBRI. “Specifically, the average ratings for alignment and satisfaction have declined since 2020, while more retirees say that spending has increased and is higher than they can afford.

“Inflation appears to be a major driver of the misalignment between expectations and reality..."
— Bridget Bearden, EBRI research and development strategist

“Inflation appears to be a major driver of the misalignment between expectations and reality, a double-edged sword that undoubtedly increases actual spending but also reduces spending, likely out of a desire to protect future purchasing power,” Bearden said.

“Having a spending plan before transitioning to retirement is important in retirement wellbeing,” said Jason Fichtner, senior fellow, Alliance for Lifetime Income & Retirement Income Institute, adding, “This study underscores how expanding availability of professional financial help and improving awareness of protected income options contribute to comprehensive spending plans for retirement and can improve retirement security.”

Additional survey findings

Other key findings of the survey include:

• Among those who decreased either their essential or discretionary spending since the pandemic, the most common reason cited by roughly 9 out of 10 retirees was concern about inflation.
• Overall, approximately 7 in 10 retirees say they have three months of emergency savings. Black and Hispanic retirees, those in lower annual household income segments, low financial knowledge and poor self-reported health status are less likely to report they have three months of emergency savings set aside.
• Similar to 2020 survey results, 7 in 10 say Social Security is a major source of their income.
• Approximately half of retirees say they spend less than $2,000 each month, while 1 in 3 spend between $2,000 and $3,999 each month. Sixteen percent spend between $4,000 and $6,999, with only 3% spending $7,000 or more each month.
• On average, retirees rate their satisfaction in retirement as 7.0 in 2022, compared to 7.4 in 2020 (on a scale of 1 to 10). Similarly, retirees rated their alignment of life in retirement with expectations with an average 6.4 in 2022, down from an average of 6.8 in 2020.
• Retiree segments that reported lower senses of wellbeing across the measures of standard of living, alignment, and satisfaction included without defined benefit or other annuity income, with low financial knowledge, those not using a financial advisor, who are not married and who are female.

The most common areas of overspending

The most common categories of greater-than-expected spending were housing and health and medical insurance, Bearden said. “We asked retirees: “Now that you’re retired, how would you describe the amount you spend in the following categories?”

For this question, she added, there were five answer choices across 10 categories to indicate current spending relative to expectations.

Approximately 26% of retirees said that they are spending more than expected on housing costs and health and medical insurance. In addition, 20% of retirees said that they are spending more than was expected on medical bills.

Advisors to the rescue

So what can financial professionals do to help their retiree clients better manage their budgets? “The Spending in Retirement Survey found that roughly 1 in 3 retirees do not find it easy to assess their budget,” said Bearden.

“Advisors can help retirees and near-retirees align retirement lifestyle expectations with reality by identifying income sources and establishing a spending plan,” she said.

In another survey that EBRI conducted titled, Retiree Reflections, representing a younger retiree sample with at least $50,000 in assets, EBRI asked retirees using a financial advice professional which part of their transition to retirement their advisor helped the most with, Bearden said.

“Thirty-eight percent said it was helping to determine their risk tolerance, and 36% said the most help was in understanding how to turn their retirement savings into an income stream,” she said.

The Spending in Retirement Study was fielded during the summer of 2022. Nearly 2,000 American retirees between the ages of 62 and 75 were surveyed to assess how spending patterns and retirement wellbeing have changed since 2020. Survey respondents were 45% male and 55% female. Over half (56%) reported being married or living with a partner, and 44% reported being divorced, separated or widowed.

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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