T. ROWE PRICE: HOME EXPENSES FIVE TIMES MORE LIKELY THAN HEALTH-CARE EXPENSES TO DRIVE SPENDING VOLATILITY IN RETIREMENT
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Further, despite households experiencing an average annual spending decline of approximately two percent during retirement, the spending decreases in retirement are typically not uniform, with retirees experiencing meaningful ups and downs over time rather than a continuous decline.
Additional key insights from the data analysis include:
- One in every two retirees experienced an annual spending increase of up to
25% at some point during retirement; one in four households experienced a 25-50% spending increase; and over one in five households experienced spending increases between 50-100% .[3] - For retirees with annual incomes levels above
$150,000 - Although the drivers of spending volatility can vary with household income levels, overall spending volatility was not correlated with investable assets or household income, suggesting that retirees of any level of investable assets or income could face a high level of fluctuation in spending.
In addition to the analysis, the white paper provides insights on managing and preparing for potential spending volatility, specifically noting the importance of generating cash flows and implementing retirement income solutions that incorporate liquidity and growth opportunities. In the case of home expenses, the paper also suggests that advisors can help retirees by recommending strategies that minimize unexpected home expenses in retirement, like completing extensive repairs before retiring or right-sizing to a newer home with fewer repair needs.
"The basic financial objectives of generating income for day-to-day expenses, maintaining liquidity, and growing assets remain true both before and during retirement," said Sudipto Banerjee, Ph.D., vice president, retirement thought leadership. "By planning for and being prepared to adjust to volatility in spending, retirees can increase their odds of success in retirement. And the retirement industry can play a key role in assisting with solutions that meet all these objectives and help retirees transition from the accumulation phase to the drawdown phase."
This study analyzed data from the Health and Retirement Study and its supplement, the Consumption and Activities Mail Survey, both from the Institute for Social Research at the University of Michigan[i]. The sample used in this study tracked a nationally representative set of 1,306 retired households over the 14-year span between 2005 and 2019. More details from T. Rowe Price's analysis can be found here.
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[1] Source: ISR, CAMS, 2005–2019. Data analysis by T. Rowe Price.
[2] As of August 2021.Source: ISR, CAMS, 2005–2019. Data analysis by T. Rowe Price.
[3] Probabilities of retiree households experiencing different degrees of increase in spending between age 65 and 90. Source: ISR, CAMS, 2005–2019. Data analysis by T. Rowe Price. Actual outcomes may differ materially.
[4] Source: ISR, CAMS, 2005–2019. Data analysis by T. Rowe Price.
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