There is so much emphasis placed on saving for retirement that we often don’t consider how people spend their money in retirement – and what those spending patterns mean for retirement planning.
The Employee Benefit Research Institute looked at spending patterns of older households and found that spending varies upon whether the households are singles or couples, or whether they are in retirement or currently working.
Housing is the one major expense all households have in common, with all older households reporting it as their biggest expense. Single households spend more than half of what married households spend on housing, the researchers found. Single retirees also have much higher spending-to-income ratios than retired couples do.
Retirees spend more on health care costs than older working people do, according to the EBRI research. Long-term care costs also are a consideration in retirement planning, with seven out of 10 older individuals likely to need care and six out of 10 of them expected to receive some of that care from unpaid family members or friends.
Nearly 40% of older households had a deficit between income and spending, the research found. Households with large medical expenses, low levels of pension or annuity income, or low levels of wealth were more likely to experience income/spending deficits. When households have a deficit between income and spending, they are most likely to use irregular withdrawals from pension accounts, individual retirement accounts or other types of household wealth.
Three “spending surprises” came out in the research, according to Sharon Carson of J.P. Morgan and one of the researchers in the EBRI study.
The first surprise is the “spending curve,” that overall spending levels decline with age. The second is that retirees experience a significant spending surge right around the time of retirement as spending on home renovations, debt elimination and travel pick up. The third is that most households experienced spending volatility as they moved into retirement, with 56% of households reporting a spending change of more than 20% in each of the three years following retirement.
Researchers said the results of the study showed the need for ongoing financial advice that considers spending patterns in retirement. Along with the need for protected income in retirement, older consumers also need to maintain some liquidity for the unexpected financial bumps in the road.
Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.
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