As life expectancy continues to increase, more and more Americans are growing concerned about outliving their retirement savings. In fact, “outliving my savings and investments” has repeatedly been the top-cited old-age fear for workers in Transamerica’s annual retirement survey. Fortunately, many expenses will actually decline in retirement, such as less money being spent on gasoline or other transportation costs due to no longer needing to regularly commute to work.
A recent Employee Benefit Research Institute study also found that on average, U.S. households tend to spend less on food, clothing, and entertainment as they grow older. A significant risk, though, comes from overestimating how much one’s spending will decline in old age. For example, earlier EBRI research found that average (median) household spending dropped by 7.7 percent (5.5 percent) in the first two years of retirement and by the end of the sixth year, annual household spending was 14.7 percent (14.1 percent) below the pre-retirement level. This is already a problem since many people likely expect a greater reduction in their annual spending during retirement.
However, the study also found that some Americans will actually see their outlays increase compared to pre-retirement levels, including 45.9 percent of retirees in this sample who were spending more each year immediately after they stopped working. This could be related to people wanting to splurge somewhat on traveling or hobbies as they enter retirement, but the higher spending was found to occur even within the lower income quartiles of the sample. Further, roughly a third (33.4 percent) of retirees were still spending more than they did prior to retirement six full years after exiting the workforce.
More than one in five households in the study even had annual outlays at 120 percent or more of their pre-retirement level by the end of the sixth year. Unexpected expenses like medical bills or the need to replace durables, e.g. roof repairs or an air conditioning unit that breaks down, could of course keep spending elevated but for some Americans an unwillingness to cut back may be the problem. Regardless, it is clear that many pre-retirees may benefit from regularly consulting with a professional financial advisor to recalculate potential old-age expenses and make sure their savings are on track to satisfy such needs.
Sources: TCRS, EBRI