How Much Less You’ll Spend Throughout Retirement Depends on These 2 Factors

How much will you spend in retirement? This is a vital question to ponder as you approach your golden years. After all, a successful retirement plan not only focuses on the accumulation of money and assets, but also the sustainable consumption of that money. Spend too much too early and you risk running out of money. Then again, if you cut your spending too drastically once you stop working, you may see your quality of life suffer unnecessarily.

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Researchers at the Center for Retirement Research at Boston College recently explored the consumption rates of retirees and identified some significant long-term trends. While retired households decrease their spending over time, the CRR study found that two factors play key roles in determining just how much retirees curtail spending deep into retirement: levels of wealth and health.

How Much Less Will You Spend in Retirement?

Culling data from several surveys and studies, CRR’s Anqi Chen and Alicia H. Munnell determined the average retired household cuts its spending by 1.5-1.6% per year throughout retirement. That means, household consumption falls each year by an average of 0.75-0.80% for retirees, reaching double digits 20 years into retirement.

The researchers calculated the average consumption rate in retirement using data from the University of Michigan’s Health and Retirement Study (HRS), the Consumption and Activities Mail Survey (CAMS), as well as the university’s Panel Study of Income Dynamics (PSID).

Since it was first administered in 1992, the HRS surveys a representative sample of approximately 20,000 people in the U.S. every two years, collecting in-depth information on the income, balance sheets, pensions and health of people over 50. The CAMS, meanwhile, is a supplemental consumption survey given to about a fifth of HRS respondents. PSID also measures economic, social and health factors of households that claim Social Security.

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Chen and Munnell note that financial planners and researchers have long assumed retirees prefer to maintain their pre-retirement standard of living. However, their data shows this is more likely for wealthy and healthy households.

“While maintaining steady consumption may seem intuitive, little research has focused on longer periods of consumption in retirement. Most previous studies have looked at the change at retirement, finding a sharp post-retirement drop as retirees consume less than they did while working,” Chen and Munnell wrote in the study, “Do Retirees Want Constant, Increasing, or Decreasing Consumption?”

How Health and Wealth Impact Your Spending

While it’s no surprise that average households spend less when retired compared to their pre-retirement years, the health and wealth levels of retirees can help explain the long-term consumption patterns that the CRR researchers identified.

“Observed declines may not reflect household preferences but instead be due to financial constraints,” Chen and Munnell wrote. “However, financial resources may not be the only constraint that affects consumption paths. Households may prefer to consume more, but are unable to due to health limitations.”

Separating retirees into three groups that correspond to their levels of wealth, Chen and Munnell found that consumption declines drastically for households in the top third compared to those in the bottom two groups. The wealthiest retirees reduce their consumption by only 0.35% per year, while those in the middle and bottom brackets experience a more dramatic annual decline in consumption, spending 0.8% and 1% less per year, respectively.

Health also has an important impact on the long-term consumption rate of retirees, as those who “self-report being in better health at the beginning of retirement have flatter consumption paths,” according to the researchers.

Retirees who are in “very good” or “excellent health” see their spending rate drop by only 0.65% per year, while the consumption rate of those who report being in “fair/poor” health declines nearly twice as fast, 1.5% per year. Chen and Munnell note that spending for households with poor health often ticks up later in retirement, perhaps due to elevated medical expenses later in life.

“The results show that when households have assets and their health, they keep real consumption relatively flat over their retirement. This pattern is evident when comparing wealthy and healthy households separately and when the top tercile is ranked by health status,” Chen and Munnell wrote. “For those with less wealth or with health issues, consumption declines more over time.

“As a result, looking at all types of households together produces a clear pattern of declining consumption, as reported in other studies. But the results suggest that the decline most likely reflects wealth and health constraints as opposed to true preferences.”

Bottom Line

Estimating your expenses and consumption patterns in retirement is an important part of the planning process. Research shows that average retired households see their spending fall between 0.75% and 0.80% each year in retirement. However, how much your spending will decline in retirement is often linked to your level of wealth and physical health. Those who remain in good health and have more wealth typically don’t adjust their spending as sharply as those who are less healthy and/or have less money.

Retirement Planning Tips

• SmartAsset’s retirement calculator can help you determine how much your nest egg will be worth by the time you stop working. Meanwhile, our Social Security Calculator can help you estimate how much your government benefits will be. Remember, the longer you delay your benefits the more they will be worth, maxing out at age 70.

• A financial advisor can help you plan for retirement and decide when is the best time to start claiming Social Security. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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