Generally, people spend less in their later years after retirement, but according to research, this is often not by choice.
Therefore, the question raised by many leading retirement experts about retirement spending is now very relevant. Should advisers reconsider their assumptions when making financial plans?
According to a working paper released by the Center for Retirement Research at Boston College, only a third of the wealthiest Americans change their spending habits when they retire.
After 20 years, compared to the start of retirement, spending can decrease by 12% or more. So, on average, they decrease by 0.7-0.8% every year. The rate of decline is slightly slower for those in the middle and top thirds of wealth, but increases significantly for those with the fewest financial resources.
There is a big diversity in how people live in retirement. Key differentiating factors are financial status, spending habits, demographics and retirement goals, according to a study by the Employee Benefit Research Institute.
Let’s dive into what the general profiles of retirees are
Average Retirees. This group was, on average, more likely to report low financial assets of $99,000 or less. Their average income ranges from $40,000 to $100,000 per year. Half of them believe that they have saved more than enough for retirement, and also that their standard of living in retirement has not changed compared to when they worked. If we evaluate satisfaction with their standard of living, it is 7.8 on a scale from 1 to 10.
Affluent Retirees. In this group, retirees have access to more types of retirement income. The proportion of those with personal savings and defined benefit plans is high. They are more likely to have a financial level of assets of $320,000 or more and an income of $100,000 per year.
Comfortable Retirees. This group ranks second in satisfaction with their retirement lives after the Affluent Retirees with an average level of financial assets between $99,000 and $320,000. Major sources of income, in addition to Social Security, are 401(k) plans and Individual Retirement Accounts.
Struggling Retirees. More than 50% believe they cannot afford their previous level of living, spending less than $2,000 a month. Their financial assets are less than or equal to $99,000, and three out of four had a low income of less than $40,000. This group also has the lowest level of access to retirement income from other sources. They also rated their health status as the worst of all groups.
“Just-Getting-By” Retirees. This group mostly consists of retirees with low financial assets and incomes, and most relied on Social Security as their main source of income. But half of them owned their houses for free, compared to Struggling Retirees. And only 17 percent “Just-Getting-By” Retirees had mortgages.
Potential uncertain medical costs, especially in late retirement, the desire to leave a bequest, or an uncertain life expectancy are potential reasons to reduce consumption. Due to these reasons, many well-funded households cannot increase it or keep it at the same level.
As a result of declining health, due to medical bills, expenses increase, especially towards the end of life. But at the same time, health restrictions can prevent people, for example, from traveling, which in turn reduces spending.
Warren Cormier, executive director of the Defined Contribution Institutional Investment Association Retirement Research Center and David Blanchett, head of retirement research at Morningstar Inc., suggest «that assuming retirement spending increases annually is something that should be reconsidered by financial planners».
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