Retirees Reduce Spending As They Age, New Research Finds

March 22, 2021

Retiree spending declines annually by 2%, a new white paper finds.

Conventional retirement income planning assumes that retirees want to maintain a certain standard of living or a certain level of spending, T. Rowe Price reports. However, the data suggests that retirees tend to adjust their spending to match their income so that they can avoid drawing down their assets.

In particular, the analysis reveals that retirees choose to adjust their nondiscretionary spending (e.g., food and shelter) to match their guaranteed income (Social Security income, pensions, etc.), challenging the conventional notion that these expenses are truly fixed.

Key findings

  • Retirees set their spending to match their income to preserve their assets. Thus, understanding personal preferences between asset preservation and lifestyle or spending preservation is critical to aligning retirement income solutions.
  • The personal nature of spending in retirement makes one-size-fits-all solutions elusive. Households in the top 20% net-worth have greater discretion to adjust their spending to match their income than households in the bottom 20% net-worth. Thus, contrary to conventional wisdom, less wealthy households might benefit more from additional guaranteed income.
  • If employers want to implement post-retirement solutions as part of their 401k plan, they should consider offering a variety of retirement income solutions (e.g., managed payout funds, managed accounts, dynamic qualified default investment alternatives, annuities) that would be attractive to their workforce. To manage fiduciary risk, they should also consider offering investment advice to help their workers make informed choices about their retirement income needs. Emphasis should be put on products and services that are consistent with observed retiree behavior.
  • Spending needs in retirement are complex and evolve throughout retirement. Many retirees would benefit from the ongoing assistance of financial professionals to consider the tradeoffs between their personal preferences and financial flexibility when formulating their financial plans and adjust accordingly as changing circumstances require.

“Understanding how retirees spend is crucial to aligning retirement income solutions,” Sudipto Banerjee, vice president, Retirement Thought Leadership at T. Rowe Price, said in a statement. “Plan sponsors and financial professionals need to understand the motivations behind retiree spending in order to provide optimal retirement income solutions.”