Spending in retirement falls with age, and not by choice

It has been well established that people generally spend less in their later years of retirement — but new research shows that it's often not a matter of choice.

Rather, most retirees are likely forced to cut down costs, largely due to insufficient savings for maintaining standards of living.

But that isn’t the case for all groups. The wealthiest third of Americans change their spending habits very little, on average, during retirement, according to a working paper published this month by the Center for Retirement Research at Boston College.

Authors Anqi Chen and Alicia Munnell not only found correlations in long-term retirement spending habits with wealth, but also with health status.

“Financial planners and researchers have often assumed that retirees would like to maintain their pre-retirement standard of living. Similarly, Social Security benefits are based on the premise that people want steady inflation-adjusted income,” the authors wrote. “However, many studies have found that observed consumption is declining, implying the retirement saving shortfall is overstated.”

The new paper adds to the existing body of research by looking at retiree spending over longer timeframes, examining how wealth is related to consumption and if shorter longevity is linked with more spending in the early days of retirement.

The researchers found that spending, or consumption, decreases by an average of between 0.7% and 0.8% for every year. After 20 years, spending can decrease by 12% or more compared to the beginning of retirement.

But for the top third of households by income, the average decline is 0.3% per year.

Spending also decreases at a faster rate later in retirement for the people with the least financial resources, while for those in the middle and top thirds by wealth, the rate of decrease slows down slightly.

“The results suggest that a retirement saving shortfall exists since consumption declines are larger for households without assets,” the authors stated.

Because people don’t spend less over time by choice, Social Security is “an important resource for maintaining their preferred consumption.”

The researchers also found that declines in health can lower spending rates, potentially because health limitations can prevent people from traveling or dining out. But health problems are also linked with higher spending in the later days of retirement, likely because of medical expenses.