Post Retirement Spending Pace Varies

Many retirement income projections take an individual’s pre-retirement income, assume some percentage of that will be required to sustain spending in retirement, and then assume a relatively consistent drawdown from those funds. However, a new report suggests that spending in retirement is anything but smooth — or consistent.

In the first two years of retirement, median household spending dropped by 5.5% from preretirement spending levels, and by 12.5% by the third or fourth year of retirement. However, this reduction in spending slowed down after the fourth year, according to a new report by the nonpartisan Employee Benefit Research Institute (EBRI).

That said, while average spending in retirement fell, a large percentage of households experienced higher spending following retirement. In fact, in the first two years of retirement, 45.9% of households spent more than what they had spent just before retirement, though this declined to 33.4% by the sixth year of retirement.

Additionally, the households that spent more in the first two years of retirement were not exclusively high-income households; rather they were distributed similarly across income levels.

Drawing on labor-force status data from the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with individuals over age 50, and the Consumption and Activities Mail Survey (CAMS), the EBRI report found that, in the first two years of retirement, two in five households (39.3%) spent less than 80% of their preretirement spending, and by the sixth year of retirement, most (53.1%) of households did so.

On the other hand, in the first two years of retirement, 28.0% of households spent more than 120% of their preretirement spending — and by the sixth year of retirement, nearly a quarter (23.4%) of households still did so.

Draw, Down?

As for those declines in spending, transportation showed the highest drop in the first two years of retirement. Median spending on transportation went down by 25.1% in the first two years of retirement, although the reduction in subsequent years was small. This is expected, since commuting to and from work constitutes the bulk of transportation expenses for most people.

The median household had a mortgage payment before retirement but none after retirement.

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