New research has thrown an interesting light on spending patterns in retirement.
Three years ago, the Institute for Fiscal Studies published a briefing note looking at how the pattern of spending changes through retirement. Its key finding was “On average, retirees’ total household spending per person remains relatively constant in real terms through retirement, increasing slightly at ages up to around age 80 and remaining flat or falling thereafter.”
This was at odds with a common view at the time of a retirement income ‘smile’, i.e. that a graph plotting spending over time would have a smile shape, high at the start and end of retirement and reaching a low point around the mid-point when activity has slowed, but care needs have not kicked in.
Retirement spending patterns have now been subjected to another review, produced by the University of Bath, Institute for Policy Research and LCP (Lane Clark & Peacock – primarily Steve Webb). Their report, “Downhill All the Way?” uses information from the Family Expenditure Survey, covering over 100,000 pensioners, surveyed across the 51-year period from 1968 to 2019. This research offers valuable insights for anyone interested in long-term financial security and effective retirement income planning. Its main findings are:
Declining spending patterns in retirement
The analysis reveals that across the entire sample, pensioners’ real weekly spending tends to decline as they age. This trend persists across different income levels and is not solely attributable to reduced income. Even when real retirement income remains stable or increases, expenditure decreases, suggesting that factors beyond financial constraints influence spending behaviour.
Health and care needs
Health deterioration and the associated increase in care needs significantly impact spending patterns. As individuals age, a larger portion of their expenditure is allocated to health and care services, often leading to a reduction in discretionary spending. However, the report highlights that the future lifetime cost of care for individuals varies widely.
Using data from the Dilnot report (and thus 2009/10 prices) the report says that care costs are highly skewed, with the median lifetime cost somewhere around £20,000, but some people paying £250,000+.
According to the 2021 Census, there were 278,946 people aged 65 years and over living in care homes in England and Wales – about 2.5% of the 65+ population. Even at age 90 and above, the proportion in care homes was 21% for women and 10% for men.
Cohort differences in income and tenure
Comparing different cohorts of retirees, the study found variations in real income trajectories and housing tenure. Recent retirees tend to have higher real incomes, be less dependent on state pension and have a greater likelihood of owning their homes outright.
The latter can help explain the different spending patterns of earlier cohorts who often had lower incomes, were more reliant on state pensions and lived in rented accommodation. Ironically the reliance on rented property is now on the increase among future generations of retirees.
Subgroup variations
Unsurprisingly, spending patterns differ among subgroups of pensioners. For instance, those living alone, renters, and individuals without private pension income often exhibit different expenditure trajectories compared to their counterparts. These differences underline the danger in looking at average numbers across the retired population.
Policy implications
The report’s authors suggest that retirement planning should account for the declining spending patterns observed among pensioners – primarily those who are homeowners. Such retirees may not require a constant real income throughout retirement, as traditional models often assume.
Instead, the report calls for a more flexible approach that aligns with actual spending behaviours, which should lead to more efficient use of retirement resources and avoid too much being held back as a reserve for future expenditure. For advisers and individuals alike, this reinforces the importance of thoughtful retirement income planning to match evolving lifestyle and care needs over time.
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Understanding how your spending might change through retirement is an important part of effective retirement income planning. Whether you’re approaching retirement, already retired, or simply want to make sure your finances will support your lifestyle in later years, our advisers are here to help.
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