How will your spending change in retirement?

A new study gives insight into the spending of British retirees…

Back in May, the Institute for Fiscal Studies released one of the first pieces of academic research into the spending of British retirees. The research looks at changes in spending throughout retirement, including changes in how the items, which people spend money on, change over time. The study will help retirees to plan their spending in retirement, and allows you to compare your spending against other retirees (I’m not sure if that is necessarily a good thing!).

Perhaps the most important conclusion which the IFS reached is that those who have not yet retired shouldn’t expect their overall spending to fall sharply during retirement.

Average total household spending per person tends to rise in line with inflation through retirement, increasing slightly above inflation up to around age 80 and then rising more slowly than inflation thereafter. So, if you plan for your spending in retirement to rise more slowly than inflation, or to fall even, you are working on the basis that you will be different to most other retirees. That might not be realistic.

However, even though spending per person tends to rise in retirement, so too does the amount people save. This was quite a surprise, as it can only be the case if income rises at a faster rate than spending. However, this does seem to be the case and it is mostly the result of the “triple lock” which applies to the state pension (which means that the state pension rises at a faster rate than inflation). The IFS based their figures on the retired population as a whole, and, for those with lower incomes, the state pension makes up a large proportion of the income they have to spend.

The IFS study also tells us how the make-up of spending changes.

  • Spending on holidays increases up to the early 80s and, perhaps surprisingly, only starts falling from the mid 80s. Other UK research has confirmed a similar pattern, indicating that most people only start to reduce the number of holidays they take each year from their mid 70s onwards. Our experience is that both of these observations are correct – our clients tend to take fewer holiday once they are 75, but each of those holidays tend to be more expensive.
  • Motoring expenditure falls steeply from the late 70s. Fewer people tend to drive as they age, and those, who drive, tend not to drive as far. This is one of the areas where spending does reduce at retirement too – largely, as there is no daily commute once you stop work.
  • Spending on food outside the home tends to increase when people first retire, and only starts decreasing for people in their 80s.
  • I was surprised to see that spending on food inside the home falls with age. The IFS suggest that this may be because appetite tends to fall with age, and because people have more free time in retirement, so they may have more time to prepare food and shop carefully.  I’m not entirely convinced by their reasons and I wonder whether the IFS research may simply be confirming a wider trend – over the long term, the cost of food has been reducing for everyone (until recently). I wonder if the figures may look different in a few years’ time.
  • Importantly, average spending on household services increases through retirement. This category includes components such as home help and domestic services like cleaning. When working out how your spending might change in retirement, it does seem sensible to plan for this.

One of the key findings of the IFS study was that later-born generations of retirees have had higher incomes than earlier generations. There was a significant increase in the retirement incomes of those born between 1944 to 1948, relative those born between 1924 and 1928. Only time will tell if these increases will continue or if they will be reversed in future.

You can read the full report below:

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

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