When calculating the amount of money to set aside for retirement, financial advisers frequently recommend using the so-called 80% rule, which assumes you will need 80% of what you spent before retirement.
Now, a new study by the Employee Benefit Research Institute (EBRI) suggests that for most people, post-retirement spending actually tends to decline by even more.
“Household expenditure steadily declines with age,” says the study, which is based on data from the Health and Retirement Study.
Between ages 65 and 75, household spending declines by 19%,or just about the expected amount. But by age 85, median spending falls by 34%. And by age 95, people spend only half as much as they did at age 65. (In reaching this conclusion, the HRS followed the same people over an eight year period.)
The pattern of declining expenditures applies to outlays for the home, food, transportation, clothing, and entertainment, according to the study. One notable exception: Health-related expenses, which consume 9% of the average 50-to-64-year-old’s budget, versus 18% of that of an 85-year-old.
“This is not surprising, even if everyone in these age groups is covered by Medicare, since Medicare coverage is not comprehensive,” notes the report. Meanwhile, “declining health limits different activities and consumption of different goods, which strongly affects the decline in total expenditure.”
One caveat: Just because most people experience a steady decline in spending doesn’t mean that you will. Among a sample of 1094 people within the HRS study, 66.5% anticipated a drop in spending in retirement, versus 65.9% who actually experienced a decline. While only 8.9% expected to spend more in retirement, 15.8% actually saw their spending rise.
The bottom line? “This study’s results show that the median household in this group of retirees is doing well in retirement,” the report says. “But there are some demographic groups that are facing a difficult retirement,” it says, adding that “singles, blacks, and high school dropouts are outspending their resources.”
Moreover, the report notes that the outlook for the future may not be as bright. “The older population faces high uncertainty regarding health expenses. For example, long nursing-home stays or prolonged use of long-term-care services could deplete the accumulated wealth rapidly,” the study says.