Maintaining Retiree Spending Levels

Jul 7, 2020 / Amanda Chase, Horsesmouth Assistant Editor

The first years in retirement are, on average, retirees’ most expensive years. Furthermore, a growing number of retirees are not experiencing the expected gradual reduction in spending after they retire. The Consumer Financial Protection Bureau commissioned a study to identify ways to increase retirement preparedness and protect retirees from overspending their savings in early retirement. The study examined the financial resources and expenses of people who retired between 1992 and 2014 to assess whether they were able to maintain the same spending level on key categories for five consecutive years after retiring.

The Bureau found that 51 percent of people who retired between 1992 and 2014 had income, savings, and/or non-housing assets to maintain the same spending level for five consecutive years after retiring. The analysis shows that of the 51 percent, 27 percent of retirees had the ability to maintain the same spending level with income from pensions, Social Security, annuities and/or other sources of regular income. The other 24 percent of retirees had the ability to maintain the same spending level after adding the value of retirement accounts, savings, mutual funds and/or other non-housing assets, such as vehicles or businesses.

In general, retirees’ spending declines as they age. A common explanation for this pattern is that retirees spend less because their spending preferences and needs on categories such as transportation, travel, clothing, and entertainment decline as they age. The Bureau’s analysis found that the spending decline is associated with the inability to pay for the expenses. The study found that retirees who were unable to maintain the same spending level for five years reduced their expenses 28 percent from the first year in retirement to the sixth year in retirement. In comparison, the study found that retirees who were able to maintain the same spending level for five years reduced their expenses 19 percent from the first year in retirement to the sixth year in retirement. Furthermore, the study found that severe spending reductions (50 percent or more) were more likely among retirees who were unable to maintain the same spending level than those who were able to do so.

The Bureau examined whether the age at which retirees claimed their Social Security benefits was associated with their ability to maintain the same spending level for five years after retiring. The analysis shows that 65 percent of retirees who claimed a full or increased benefit by claiming at or after their designated full retirement age (FRA) had the ability to maintain the same spending level for five years after retiring. In comparison, 55 percent of retirees who claimed a reduced Social Security benefit by claiming before their full retirement age (FRA) had the ability to maintain the same spending level for five years after retiring.

 

IMPORTANT NOTICE
This material is provided exclusively for use by individuals with an active license to the Savvy Social Security Planning Program. Use of this material is subject to the Social Security Planning Program Agreement and applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties express or implied are hereby excluded.

© 2020 Horsesmouth, LLC. All Rights Reserved.