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Dispatches Retired Investor

Personal Consumption Rates After Retirement

Financial planners and researchers often assume that retirees would like to maintain a constant standard of living. However, several studies suggest that retired households decrease their consumption over time.

by Adam Scheg | February 2022

Financial planners and researchers often assume that retirees would like to maintain a constant standard of living. Similarly, Social Security benefits are based on the premise that people want steady inflation-adjusted benefits. However, several studies suggest that retired households decrease their consumption over time.

A brief by the Center of Retirement Research at Boston College used data from two surveys to identify actual trends in consumption: the Health and Retirement Study’s Consumption and Activities Mail Survey, and consumption data from the Panel Study of Income Dynamics. The rates of decline shown in the two studies are very close: 1.5% to 1.6% every two years. These rates imply that consumption could be about 12% to 13% lower 20 years into retirement than at the beginning of retirement. The studies also contradict the hypothesis of higher wealth households or those in better health maintaining more constant consumption.

Consumption decreases by about 0.7% every two years for those in the top wealth group (tercile) compared to 1.6% and 2.0% every two years for the middle and bottom wealth groups. Consumption for those in very good/excellent health decreases by about 1.3% every two years. Those who self-report good health or fair/poor health reduce their consumption by 1.5% and 3.1% every two years.

An exception is higher-wealth households who self-report very good/excellent health at retirement. They maintain “a virtually flat consumption pattern,” with consumption declining by about 0.6% every two years. Conversely, declines of 1.1% and 3.2% were observed for higher-wealth households who started retirement with good or fair/poor health.

The results show that, for the general population, consumption declines over retirement. However, the data shows both wealth and health as influencing trends in consumption for retirees.

Source: “Do Retirees Want to Consume More, Less, or the Same as They Age?,” by Anqi Chen and Alicia H. Munnell, Center of Retirement Research at Boston College; December 2021, Number 21-21.

Discussion

STEPHEN P from GA posted over 4 years ago:

At some point, we will stop flying and sell our airplane, and perhaps later, we will stop RVing and sell our motorhome. Whether the recreational pursuits that follow will be more or less expensive is hard to say. If I look at our current health limitations, and what is likely to come with aging, it seems to be common sense that personal consumption (outgo) must decline. However, if we were to continue to cultivate generosity, perhaps the redirection of "fun" money to charitable causes might keep things on par... I'm reminded: “Our work is great; our time is short; the consequences of our labors are infinite.” (John Newton)


JOHN B from CA posted over 4 years ago:

Great article!


JOHN L from NJ posted over 4 years ago:

This pattern of declining expenditures is in line with my observation of my parents and in-laws. First Go-Go, then Slow-Go, and finally No-Go.


JAMES S from CO posted over 4 years ago:

This author makes a common mistake made by economists. They ignore their source material's biases. In this case the Health and Retirement Surveys are extremely detailed expenditure reports prepared annually by the survey's participants. But who maintains this king of detailed spending information? Frugal people do - not spendthrifts. Think about the people you know. If the person spends like there is no tomorrow, how likely are their records to be detailed and accurate enough to be able to fill out these very detailed questionnaires annually? I queried the team at HRS's and they make no effort to identify the person's spending BEHAVIOR prior to asking them to fill out these forms. And they do even ask for a self assessment of one's BEHAVIOR; as in "I spend like the wind" or "I am a very cautious spender." Those who then analyze the surveys and conclude that retirees spend less in retirement, fail on multiple accounts. 1) They do not get a good cross section of spendthrift type behavior but only frugal type behavior. 2) They compound this error by reporting the average results which erroneously claim that the average represents retiree's en mass. If you work with clients, there is no average person. We all come with flaws, biases and misinformation that drive our decisions and our spending behavior. And most of us deviate from our own norms given the right incentive or threat. It would help if those who use these studies, recognize that they are dealing with a subset of retirees that DO NOT reflect the vast number of Americans; those who do not track their spending and therefore do not participate in these studies. I won't even begin to discuss health care costs in retirement or the way clients hide some of their spending from researchers out of embarrassment. Jim S


Hugh P from WA posted over 4 years ago:

Good commentary from James S...I am always suspicious of self-reporting surveys for the reasons he brings up...do those sexual activity surveys reflect bragging/wishing or embarrassment? I would look for age demographics of customers/participants, maybe use techniques as for building actuarial tables?


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