The Myth of Retirement Spending

Conventional wisdom is that retirees spend a fixed amount per year in real terms (i.e. after adjusting for inflation), meaning that the amount they need, in Pounds and Pence, rises each year with inflation. But evidence on actual spending behaviour seems to suggest that this is wrong – inflation adjusted spending seems to fall as you age.

Previous research (1) suggests that real (i.e. inflation adjusted) spending is not flat over time but rather declines with age, at around ~1% per year on average. However, new research (2) has found that real spending for wealthy couples declined even faster, at ~3% per year on average.

This study also broke down the data into couples versus singles as well as by how wealthy the household was around age 65. It found that single households reduced real spending by -1.5% per year on average, while couples reduced real spending at -3.1%.

A key outstanding question is whether retirees want to spend less, or if it is something they do because they feel financially constrained. There seems to be some evidence that retirees choose to reduce spending over time:

  • Affluent people lowered their spending about as much as less-affluent people.
  • The amount which older retired people spend on gifts and donations rises, especially for wealthier people, which may be an indication that they are not financially constrained.

A separate study (3) concluded that “the majority of individuals at advanced ages reported less enjoyment from spending on travel; dining out; leisure activities; and new appliances, clothes, or a car… at the same time, indicators of financial or of being financially constrained were much less frequently reported at advanced ages.”

If a decline in spending is, in fact voluntary, this would validate the idea that there are three phases to retirement: the go-go years, the slow-go years, and the no-go years.

Some caution is required with these studies. As usual, the studies are carried out in the USA (we appear to have very little appetite for this type of research here), but there does not seem any reason why things might be different in the UK to the USA (apart from the cost of healthcare – see below).

What about the cost of healthcare?

Another big question, which is becoming increasingly important in the UK, is healthcare costs, particularly in later life. Will the “no-go” years come with increased spending on privately funded medical procedures, as well as the possibility of paying for nursing homes and long-term care? Will the increase in healthcare costs exceed declines in other kinds of spending, like leisure and travel?

Sadly, there is very little research into this area. The increase in the number of private medical procedures in recent years doesn’t seem to have yet registered with the authorities. However, in the US, where payment for medical procedures is the norm, studies have shown that the average spend on healthcare in later life is very small (4). However, the range of spending is very wide – most people spend very little, but some are forced to spend a lot. This has given rise to a market for insurance for this type of cover. It would be good to see a similar market develop here.

Everybody is different

The research on this topic, tells us about averages. But nobody is average – everybody’s experience will be different. Some will end up spending more over time in real terms. Others will have spending that bounces up and down over time, without a clear direction.

But averages are still useful for determining a starting point for planning.

It might not be bad to assume that you will increase your spending in line with inflation throughout your retirement. However, there is a risk that your assumption will have been too cautious. The consequence of this is that you may have surplus funds at the end of your life (and you might pay more inheritance tax as a result), that you could have stopped work sooner, or, even, that you could have spent more after you stopped work.

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.
  1. The Retirement Consumption Conundrum: Evidence from a Consumption Survey – Fisher, Johnson, Marchand, Smeeding, Torrey, December 2005.
  2. Spending Trajectories After Age 65 Variation by Initial Wealth (The Journal of the Economics of Ageing (2023)).
  3. Explanations for the Decline in Spending at Older Ages. Rohwedder and Hudomiet, April 2023.
  4. Out-of-Pocket Medical Expenditures in the United States: Evidence from the Health and Retirement Study. Sean Fahle, Kathleen McGarry, and Jonathan Skinner. November 2016.

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