We all know that saving for retirement is a huge determining factor for how successful your golden years will be. But a new report is looking at the other side of the ledger – how much people are spending in retirement.
The Employee Benefit Research Institute released a longitudinal study on how spending changes in retirement.
“Understanding spending patterns will not only help current retirees succeed, but it will also help policymakers, employers, financial firms, and advisors assist current workers as they plan for a successful retirement,” said Sudipto Banerjee, author of the study.
Banerjee’s point makes sense: How can you know how much to save for retirement if you don’t know how much you will be spending?
“A person’s retirement financial success depends on two key components — savings accumulated during working years, and spending during retirement years,” he wrote in the report, “Quantifying these two components and their underlying behavior patterns is essential to understanding how people are likely to succeed in retirement.”
Post retirement, there tends to be a reduction in spending levels. According to the study, household spending goes down an average of 5.5 percent in the first two years, and drops by 12.5 percent by the third or fourth year. The study showed that after that, the decline slowed significantly. However, it can take a while for the spending reduction to level out.
Work expenses explained much of the drop off in spending. In addition, transportation spending goes down 25 percent – as retirees are no longer commuting back and forth to work.
It’s important to note that the study did find that in the first two years after retirement, 46 percent of retirees spent more than what they’d spent in the years immediately leading up to their retirement. Some spent a lot more: 28 percent spent 20 percent more than they did before retirement.
It wasn’t just affluent retirees who saw a boost in their spending either – the study showed that spend-happy retirees were seen evenly across different income levels.
“A possible explanation for this could be that people may want to splurge as they enter retirement by traveling or spending on their hobbies,” writes Banerjee. In fact, many seniors are starting encore careers well into their retirement as a way to give back, or capitalize on their hobbies.
It’s not unheard of for a retiree to live another twenty years after retirement, in fact, that’s the average.
Jamie Hopkins, Forbes author of “Retirement Risks: How to Plan Around Uncertainty For A Successful Retirement,” offers two suggestions to ensure you have spending money well into your retirement.
First, Hopkins recommends considering deferring your social security benefits. For each year you delay applying for benefits you get 8% more each subsequent year. Another option he offers is the purchase of an annuity to ensure you have guaranteed income.