Demographic shift of retirees to affect consumer spending

Some retirement destinations will likely see more than 30% consumption growth due to population shifts.

Feb 24, 2017 @ 12:00 pm

By Mary Beth Franklin

Major demographic shifts over the next decade will have a dramatic affect on U.S. consumer spending, which in turn will influence the overall economy, specific industry sectors and individual stocks, according to a new report from The Conference Board.

But because population growth will be uneven, favoring the South and West as retirees continue to migrate to the Sunbelt in search of warmer climates and lower taxes, the shift in population from the Northeast and Midwest could affect public sector spending and municipal bond markets.

The report, "The Impact of Demographic Trends on Consumer Spending," examines the size and age distribution of the future population, how spending patterns will change as people age and provides perspective on how population-growth trends are likely to impact future spending. While the U.S. population as a whole will grow 8% between 2015 and 2025, the number of people between the ages of 70 and 84 will spike by 50%.

As people age, they also retire. The number of retirees is currently increasing by about 1.2 million a year, about three times more than a decade ago, the report noted.

Big changes

Retiring dramatically changes both time allocation and consumption patterns.

Demographic shifts will have a significant impact on health care spending. "Over the next decade, health spending will grow 15% due to demographic trends alone, compared with 8% for total consumption spending," said Gad Levanon, chief economist, North America, at The Conference Board and an author of the report. "More so than any other category, health-care spending is concentrated among the oldest households," he said. "Long-term care, in particular, is likely to experience even more dramatic growth of 20% to 25% due to demographic trends alone."

When people retire, they tend to spend more time at home on various activities and hobbies. As a result, spending in categories such as household maintenance, gardening, reading and pets is likely to grow well above the rate of total consumption, the report said.

In addition, consumption of products that target the older population within other broad consumption categories, such as personal care products and travel, is likely to experience rapid growth as well.

At the same time, consumption categories that older households tend to spend less on, including men's clothing, food away from home and rented homes and used cars, will experience slower-than-average consumption growth.

Since the bulk of education sector spending is concentrated within the 5-to-24 age range, which essentially will remain unchanged from 2015-2025, that industry is likely to see slow growth rates in the coming decade along with related product categories such as school supplies and youth clothing, the report predicted.

Retirement destinations

The population shift from the Northeast and Midwest is likely to remain in place from 2015 to 2025. But because the baby boom generation is so large, the number of retiring boomers will make the shift to retirement destinations an especially important demographic trend over the next decade. As a result, the U.S. is likely to experience large variations in consumption growth across states and metropolitan areas the report said. While consumption in such states as Florida, Texas, Arizona and Nevada is expected to grow more than twice as fast as the national average, states such as New York and Illinois will barely see any growth at all. Rhode Island and Michigan will actually experience negative consumption growth.

Consumption in retirement destinations is likely to grow especially fast, with many of these areas likely to experience more than 30% growth in consumption.

Moving from macroeconomic spending patterns to the spending behavior of individual retirees, a new analyses by Derek Tharp, a research associate at, questions the conventional wisdom that assumes retirees should aim to maintain purchasing power throughout retirement by receiving a consistent stream of cash flow that increases annually with inflation as embodied in the widely used 4% withdrawal rule. But it turns out from a growing base of research that is not a particularly realistic goal for most retirees.

Reduced spending

Instead, various studies are finding that real spending actually declines in retirement by as much as 1% to 2% per year. Compounded throughout retirement, this discrepancy between standard industry assumptions and actual retiree behavior may be underestimating the safe withdrawal rate.

"It appears likely that at least some kind of reduced-spending-over-time assumption is more accurate than the existing baseline of constant real-dollar spending," Mr. Tharp wrote. "The 4% rule may realistically be closer to 4.5% rule."

So what does this mean for financial advisers? The Conference Board's report on demographic trends may offer some insights as advisers explore their future investing strategies. But when it comes to individual clients, developing a personalized retirement income plan based on client's actual spending patterns with regular course corrections will be far more valuable than any standardized rule of thumb. It is also an approach that is uniquely human and can't be replicated by a robo-adviser.


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