Spending patterns in retirement
How to fund your desired future lifestyle is a key part of retirement planning.
Underspending, and the accompanying regret of opportunities not lived, can be as equally emotionally damaging as overspending and ultimately running out of money.
Historically, there has been a view that spending tends to flatten after the age of 70 and this can be easily modelled, together with or without any requirement for expensive long-term care in the later years.
However, recent and interesting research from the Institute of Fiscal Studies (IFS), which looked at the spending patterns of retirees in the UK, contradicts these assumptions.
Some of their main conclusions were as follows.
- On average, retirees’ total household spending per person remains relatively constant in real terms through retirement, increasing slightly at ages up to around age 80 and remaining flat or falling thereafter.
- The composition of spending changes as people age, with per-person spending on food inside the home and on motoring falling steadily, spending on holidays increasing up to age 80 and then decreasing, and spending on household services (which includes spending on home help and domestic cleaning) and household bills increasing in later years of retirement.
- Households with above-average incomes for their age and birth cohort have an increasing profile of spending in their 60s and 70s (for example, increasing by 7% between ages 67 and 75 for the 1939–43 birth cohort), with spending falling slightly for those in their 80s.
- Disability benefits make a small but significant difference to incomes, particularly in later life.
The important planning points here are that we ought to assume spending continues to rise in line with inflation well into your 70s. This will avoid understating your spending and assets required to support that spending.
If you rely on an income stream (annuity) that doesn’t rise in line with inflation, topping up your lifestyle spending with other assets may actually continue for longer than you had originally imagined.
Personal Inflation Rate
The rate at which you experience inflation will depend on your spending habits. You ca use this calculator to estimate your personal inflation rate: FT Personal inflation calculator
We’ve provided the key points, but if you’d like to read the full report, you can do so here: How does spending change through retirement?
Finally, we’d recommend you revisit your own personal plans and assumptions to ensure you’re well set up to fund your spending in retirement. And if you have any questions, please get in touch. We’re here to help.
