Retirees Underestimated Basic Living Expenses

WINSDOR, Conn. Oct. 16, 2017 – A new study by LIMRA Secure Retirement Institute finds 26 percent of retirees said their basic living expenses in retirement were higher than they expected prior to retiring.  Another 4 in 10 of retirees underestimated health care and long-term care costs.  On average, two-thirds of retirees’ expenditures are spent on basic living expenses and health care and long-term care costs.

“Mismatches between spending expectations and experiences are strongly associated with retirees’ confidence levels,” said Matthew Drinkwater, PhD., assistant vice president, LIMRA Secure Retirement Institute. “Our study found retirees whose basic living expenses or health and long-term care expenses are higher than anticipated generally express lower confidence in their ability to live the retirement lifestyle they want.”

Six in 10 retirees who said their basic living expenses were significantly higher than they expected did not feel confident they would be able to live their desired retirement lifestyle.  For those who encountered significantly higher than expected health care and long-term care costs, a third (32 percent) said they were not confident they would be able to live their desired retirement lifestyle.

The study found women are 50 percent more likely than men to say that their basic living expenses are somewhat or significantly higher than they expected before they retired. (30 percent versus 20 percent, respectively).  Women are also slightly more likely to experience higher than expected health and long-term care-related expenses than men are (43 percent vs. 39 percent).  Among retirees who faced unexpectedly higher basic living costs, women express lower levels of confidence that their savings and investments won’t run out if they live to be 90 (36 percent of women vs. 49 percent of men).

Not surprisingly, lower-income retirees are substantially more likely than higher-income retirees to say that their basic living expenses are higher than anticipated. Among retirees with incomes between $35,000 and $49,999, 35 percent say these expenses exceeded their expectations prior to retirement.  When you consider that retirees with household incomes of $35,000 to $49,999 spend almost 60 percent of their income on basic living expenses, the added unexpected costs could substantially affect their retirement confidence.  Retirees with incomes of $100,000 or more spend about 45 per­cent of their income on basic living expenses, and only 15 percent claim that expenses are higher than they thought they would be.

“Many retirees say they would cut back on discretionary expenses to compensate for larger than expected basic living expenses and/or health and long-term care costs,” noted Drinkwater.  “This is not necessarily a practical solution. Generally speaking, our study found discretionary spending represents less than 20 percent of total expenses for retirees. And those facing these unexpected higher expenses already spend very little on discretionary items.”

How can consumers avoid miscalculating their expected expenses in retirement?

Institute research indicates consumers who conduct retirement planning activities or have a formal written retirement plan prior to retirement have a greater likelihood that actual expenses resemble anticipated expenses. Sixty-nine percent of those with a formal written plan say discretionary expenses are about the same as expected versus 51 percent of retirees without any plan. These results are consistent with earlier Institute research, showing that formal written plans are associated with favorable retirement outcomes.

To view an infographic highlighting the findings, please visit: Experience Versus Expectations in Retirement Spending.