Financial Focus - When I’m Sixty-Four

November 04, 2019
By Brian L. Mackin, CFP®

Spending money is easy when you’re still working. But how about if you are thinking of retiring? A key assumption in any retirement cash flow projection is estimating how much will we spend in our golden years. One approach is to assume a constant level of spending every year throughout retirement (e.g. 80% of pre-retirement income), with some variability based on income and lifestyle. However, in our experiences working with clients over the years, spending patterns typically evolve over time. Certain categories, such as health care costs, are likely to increase as we get older; other categories, including transportation costs, usually decline or are eliminated altogether. A recent study by the Employee Benefit Research Institute (EBRI) gives credence to these observations.

Using data from the University of Michigan’s Health and Retirement Study and Consumption and Activities Mail Survey, EBRI analyzed household spending patterns from 2005-2017 for those over the age of 50 (age groups: 50-64, 65-74, and 75+). Below are some of their conclusions:

  • Total spending was lower for households in older age groups compared to younger age groups. The 75+ age group spends, on average, a third less than those in the 50-64 age group.
  • In all survey years studied except 2017, housing is the largest spending category for all groups.
  • On average, the amount spent on food and entertainment declined with age.
  • Older households allocated a larger share of budgets to gifts and contributions.
  • Transportation and clothing costs, often considered to be largely work-related, decline with age.
  • Health care costs increase with age, though the average annual share declined after 2007, when Medicare Part D went into effect.
  • Median non-housing wealth increased with age, but leveled off and even declined as households reached ages 75 or older.
  • Retirees are quick to cut expenses and increase savings in response to a market downturn or recession.

While every situation is different, it is important to understand likely spending patterns over time. Research like that of EBRI suggests people spend more in their early retirement years (with travel being the most common bucket list item) and gradually decrease their spending as they age. As the Beatles sang, "Every summer we can rent a cottage/In the Isle of Wight, if it’s not too dear/We shall scrimp and save/Grandchildren on your knee/Vera, Chuck and Dave.” While you don’t have to be quite that specific, having a vision and planning ahead are key components to maintaining your desired lifestyle in retirement.

Meet Brian L. Mackin, CFP®.

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Important Disclosures

West Financial Services, Inc. is an SEC registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.

Information contained herein was derived from third party sources including, but not limited to, Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Please contact us if you would like to obtain a copy of the third party sources.