The U. S. Bureau of Labor completed a survey which I recently found that may shed some interesting light on retirement and retirement spending. It is entitled The Consumer Expenditure Survey.
The survey listed eight categories of expenditures: (1) Apparel & Services, (2) Entertainment, (3) Food & Alcohol, (4) Health Care, (5) Housing, (6) Transportation, (7) Miscellaneous, (8) Personal Insurance & Pensions.
The survey then listed each household by age brackets. They were ages 45-54, 55-64, 65-74 and 75+.
The actual expenditures for each category were then listed for each age bracket. The 45-54 age group expended $48,748 per year. The 55-64 age group spent an average of $44,330. The 65-74 group spent $32,243 and the 75+ age group spent $23,759.
Not surprising health care costs did increase with each age group, but surprisingly every other category decreased with the passing of each decade.
On the surface, this is not too revealing, but after careful study, I found these results extremely important.
Historically, retirement planners like me, approach the funding of retirement on a linear basis. You set a retirement goal, say $4000 per month and then you add an inflation factor and let the numbers compound.
The goal grows quite rapidly over the years even with the most modest inflation assumption.
The results of these ever-increasing income needs dramatically influence issues like the start date for retirement, the amount of investment or pensions income required, the degree of investment risk and the projected investment return required to meet the goal.
After considering the Expenditure Survey, it appears that in reality retirees do not continue to spend more in retirement but less as the members of the household become older.
It does make sense. When you are younger, you travel more, you entertain more, you eat more and you spend more on clothes and nearly everything else. Even your housing expenses are more since many retirees enter retirement before the house is paid off and finish the mortgage payoff in retirement.
I did an informal survey of my personal clients. I grouped about one hundred of my clients and studied their income goals and in nearly every case their pattern was the same as the survey.
The numbers were higher allowing for California’s cost of living, but they all reduced their budgets as they grew older. It also appears that the reduction in spending is totally voluntary. It is not a matter of retirees spending principal, liquidating their nest egg and becoming poorer. In another U. S. Census Bureau study, the net worth of every age group actually increased from decade to decade. Retirees are not spending less out of necessity. They are spending less, and they are saving more. Their wealth actually increases with age.
Granted, it is logical that as we age, we slow down a bit. We spend less because we stay closer to home.
Many older people eat much less and do not need the latest fashions. Some say you can tell when a man retires because his clothing style is that of era when he retired.
Can we draw any conclusions? The inverse relationship between age and spending has serious implications. The reality is that retirement could possibly come earlier for many considering retirement.
The number of investments required to retire may be dramatically less. The pressure may be off with so many of the issues that create worry in retirees.
Becoming a “bag lady” is not a reality for most retirees.
However, other issues that were not addressed in the Census Bureau study like long-term nursing home costs.
I am certain that those in nursing homes at the time of the survey were not included. Protecting assets against the high cost of nursing home is important. I am not advocating “spend it all while you’re young, live only for today and let tomorrow take care of it'sself.” That’s just not my style. Careful planning is still needed, but considering the reality that older retirees will spend less makes enjoying retirement earlier while you are younger a more pleasant thought.
Fretting over whether the nest egg will last to the point of stressing out may also be removed.
As usual, I suggest that you run the numbers. Be realistic and cautious in your assumptions. Consider how the budget will be different in retirement. What will be paid off? Who will be graduated from college or married? Many life events will be behind and your cost may be less.
The implications of this so-called “reality retirement planning” not only has income issues to consider but it also may change your estate planning, insurance planning and income tax planning too. Plan well and live well."
Notable quote: “Liberty and property. One and inseparable. Now and forever.” -Daniel Webster.