Does spending go up or down over the course of the retirement years, or does it remain the same? This question is obviously of critical importance for retirement planning, yet the standard answers may not be accurate.
Traditionally, financial planners have assumed that during retirement, income needs remain constant but that due to inflation, expenditures rise every year. However, hard data on consumer spending demonstrates otherwise.
Financial planner Ty Bernicke has shown that as retirees age, they actually lower their expenditures enough to more than offset the effects of inflation.
Examining data from the U.S. Department of Labor’s annual Consumer Expenditure Survey, Bernicke noticed that retirees spent significantly less than people who were still working, and that older retirees spent less than younger retirees. The drop in retiree spending was present in all basic categories — food, shelter, clothing, transportation and entertainment — except healthcare, which was somewhat higher for older retirees.
The reduction in spending does not seem to be the result of historical circumstances, such as having lived through the Great Depression, since it is evident across generations. As seen in the chart above, people aged 55 to 64 (born between 1932 and 1941) spent a little more than $55,000 per year in 1996. Twenty years later, they were spending $38,691.
Now, consider a younger generation. In 1996, those aged 45 to 54 (born between 1942 and 1951) spent an average of $65,111 per year. By the time they had retired in 2016, they were spending just $50,873, suggesting that regardless of the generation, personal expenditures decline in retirement.
It is well documented that retirees’ assets often grow during retirement, so decisions to cut back are not due to a lack of financial resources. If outlays actually decrease during retirement and net worth grows, why do we see consistent cuts?