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Retirement Planning > Spending in Retirement

Why Spending Falls and Financial Satisfaction Rises in Old Age

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What You Need to Know

  • As people age, spending on transportation and travel falls while spending on health care and gifts rises, according to a new paper from the University of Michigan.
  • It doesn't appear most people of advanced age are forced to cut spending due to money constraints, the researchers found.
  • They found evidence that older people spend less on favorite pastimes because they enjoy them less.

People tend to spend less money in advanced old age but report feeling more satisfied financially than younger counterparts near retirement, according to recent research, which suggests that older adults incur fewer expenses as their interest in favorite pastimes wanes.

Individuals’ enjoyment of various activities may decline “with worsening health, widowing and increasing age, leading to a lessening desire to spend on them,” according to a working paper from the University of Michigan’s Michigan Retirement and Disability Research Center.

“We find strong support for this hypothesis,” researchers from the RAND Corp., the Network for Studies on Pensions, Aging and Retirement, and the National Bureau of Economic Research wrote.

Data from the study suggests most older people aren’t forced to cut spending as a result of their behavior, i.e. overspending and under-saving years earlier, they said in the paper, released in June.

To interpret and reconcile the decline in spending and greater economic satisfaction in older age, authors Susann Rohwedder of RAND and NETSPAR, Michael Hurd of those organizations and NBER, and Péter Hudomiet of RAND used new data from the 2019 wave of a consumption and activities mail survey of people older than 50.

The fraction of respondents satisfied with their economic situation is considerably higher at older ages than for those near retirement age, and more people in their 80s reported feeling no or few financial constraints compared with younger survey takers, according to the researchers.

“Nonetheless, close to 20% of those older than 80 report not being satisfied with their financial situation, pointing to heterogeneity in economic security,” they wrote.

How Retirees’ Spending Changes

The authors cited evidence to support the idea that as people age, spending on activities dependent on good health, such as travel, declines as they shift their expenditures to health care and other “substitutes.”

About 20% of total spending among those ages 65 to 69 goes to private transportation primarily cars and trips and vacations, according to the researchers. “These categories are likely complements to health because of an increased risk of accidents as eyesight and hearing decline in the first case and, in the second case, the physical demands occasioned by travel,” the researchers wrote.

At ages 85 to 89, such spending accounts for about 10% of the total, they said. “An indication that this reduction is not solely due to the lifetime budget constraint is that budget shares for transfers and gifts, a luxury good that should be independent of health, increase with age. This implies that the budget constraint is not an explanation for the overall reduction in spending,” the research team said.

Declining Enjoyment

To obtain direct evidence for their hypothesis that health and other aging-related factors are key to a spending decline at older ages, the researchers collected survey data on individuals’ perceptions about changes in their enjoyment of various activities.

They found that average scores on enjoyment derived from seven activities, such as dining out, traveling and buying clothes, indicate a decline in enjoyment over a six-year period, and that the decline accelerates with age.

“It does not appear that the decline in enjoyment is due to financial constraints because the fraction indicating a worsening of their financial situation (over the previous six years) declines with age,” they said.

The team noted that financial satisfaction levels increase with age, reaching almost 45% among those over age 80. The fraction of dissatisfied individuals declines from almost 45% among 55- to 59-year-olds to under 20% for ages 80 and older.

“We interpret the results to indicate that at least part of the spending decline comes from individuals choosing to spend less on some activities because they get less satisfaction from spending on them,” the researchers wrote. “At least on average, it is not necessary to invoke a behavioral explanation for the decline in total spending.” 

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