Spending

IFS: Retirement expenses increase between 62 and 80 – DB & Derisking

The institute’s study “How Spending Changes in Retirement” sheds light on spending patterns in the early years of retirement and refutes the notion that as people change, their spending naturally declines .

He found that, on average, total retiree household expenditure per person remains relatively constant in real terms throughout retirement, increasing slightly until about age 80 and remaining stable or decreasing thereafter.

If people end up spending more than expected as they age, there’s a chance they’ll exhaust their retirement pots too soon.

Becky O’Connor, interactive investor

Spending increases for 62 to 80 year olds

While total expenditure appears to decline significantly with age, when controlling for birth cohort differences by examining changes within each generation, the relationship between age and expenditure is flat, even slightly increasing in some cases.

The upward spending trend is especially prevalent among people aged 62 to 80 and among couples, the study found.

The IFS found stark differences in spending levels between five-year cohorts, and particularly between those born in 1934-1938, 1939-1943 and 1944-1948, which it says shows the importance to consider generational differences when looking at age. spending profiles.

People born between 1939 and 1943 spent an average of £245 per person per week at age 67, rising to £263 per week at age 75 – just under 1% a year or 7% when adjusted for inflation.

People born between 1924 and 1928 spent £197 a week at age 82, down 6% in inflation-adjusted terms to £185 at age 88, around 1% each year.

The IFS analyzed the spending habits of current retirees using primarily the UK Cost of Living and Food Survey, from 2006 to 2018.

Vacation spending rises then falls in the mid-1980s

The study found that while some costs decline during retirement, others increase because the composition of spending changes as people age.

Food expenditure per person within the household decreases, consistent with the fact that appetite tends to decrease with age, possibly due to reduced activity or illnesses.

However, spending on food outside the home increases upon retirement and does not begin to decline until individuals are in their 80s. Expenditures on automobiles, alcohol and tobacco decrease during retirement.

Meanwhile, vacation spending increases through the early 1980s and only begins to decline from the mid-1980s, while automobile costs drop sharply from the late 1970s, because people drive less as they age.

Comparing people aged 82 and born in 1924-28 with those aged 62 and born in 1944-48, the IFS found that 57% of older people spend something on automobiles and 19% spend something on holidays.

Meanwhile, the youngest group spends 83% on cars and 41% on vacation. These two expense categories represent relatively large shares of early retirement spending and show interesting age patterns, according to the IFS.

The estimated increase in holiday spending is substantial – an increase of £13.60 per week on average aged 65-80.

Generations born later tend to spend more early in retirement on leisure services and vacations. These represent 7% of the total expenditure of people aged 65 born in 1924–28, while they are 11% for those born in 1944–48.

The IFS said this could mean that “spending by younger and future generations of retirees could rise more steeply with age than is the case for current retirees”.

Higher household bills in subsequent years

Spending on services and household bills has been rising in recent years, with the IFS estimating that weekly spending on household bills and costs is rising by £6.70 per person aged 75-85.

Andrew Tully, technical director at Canada Life, said: ‘It is worrying to see spending on bills seem to increase after the age of 75, possibly reflecting the death of a spouse and no longer being able to share the burden household expenses. ”

Becky O’Connor, head of pensions and savings at Interactive Investor, warned there is a risk that people will assume they won’t spend as much as they enter their 60s and 8s, which is turns out to be false.

She said: ‘People imagine they won’t be going out as much and going on holiday as much. While this is true, new, unpredictable spending demands can arise later in life and blow the budget.

“If people end up spending more than expected as they get older, there’s a chance they’ll exhaust their retirement pots too soon.”

The IFS also discovered differences in the spending habits of different types of households.

Households with above-average incomes for their age and birth cohort have an increasing spending profile in their 60s and 60s, with spending falling slightly for those in their 80s.

However, rising incomes mean more people are saving and at higher rates as they age, the study found. For example, for people born between 1939 and 1943, 59% had saved at age 67, but this figure rose to 69% at age 75.

Since the public pension tends to rise faster than prices over time, a decreasing profile of income from private sources might be appropriate, especially for those more dependent on the public pension, the IFS noted.

If individuals are largely dependent on private retirement income, a non-indexed pension would expose them more to inflation.

The IFS pointed out that the death of one member of a couple will affect the expenses of the surviving partner because shared expenses such as housing costs will not decrease when their partner dies.

Households need to consider how such changes in circumstances like this will affect their income and spending to ensure they have enough resources to be able to fund the increased per capita spending, warned the institute.

“Future retirees, who are less likely to have occupational or public pensions with a survivor benefit, will need to decide how to take this into account when deciding the speed of withdrawals and whether to purchase an annuity that offers benefits. survivor,” he added.

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Tully said this was particularly important given the current cost of living crisis and rising inflation.

“With the cost of living crisis on everyone’s minds, people on fixed incomes such as retirees will have fewer levers to pull to meet the challenges we face,” he added.

“Many of those who need it are already tightening their belts, reducing their energy consumption, going out and eating out less often or changing their shopping habits, and this will only get worse as inflation rises. throughout the year.”