Financial Behavior in Retirement Years

Traditional retirement planning models usually assume that our spending habits will remain consistent during retirement-simply adjusting each year for inflationary increases in the cost of living, travel, dining out, and other activities.

However, is this assumption accurate? A recent study conducted by the RAND Corporation, using data from the University of Michigan’s Health and Retirement Survey, offers a different perspective. The study showed that real spending for single retirees decreased by about 1.7% annually after the age of 65; for couples, the rate of decrease was 2.4% per year.

Multiple theories could explain this downward trend. One might assume that as people age, their living costs become less manageable. However, the study found no correlation between declining spending and wealth levels. In fact, retirees from all financial backgrounds increasingly allocated more of their budgets to gifts and charitable donations as they aged.

A more plausible theory, though not conclusively proven by the research, suggests that younger retirees are more active and thus more likely to travel and dine out during their 60s and early 70s. Their interest in luxury items such as new cars and clothing might also wane as they age.

When it comes to specific figures, the study showed that the median household spending for retirees aged 65-69 was $28,505 for singles and $53,990 for couples. By the time these individuals reached their 80s, these figures dropped to $26,094 and $38,885, respectively. Of course, these numbers varied based on personal lifestyle choices. A category-wise breakdown revealed that spending on travel and leisure decreased the most as retirees aged. Interestingly, healthcare expenses remained relatively stable, especially for couples. For all age groups, the most significant expenses were housing (23-25% of the total budget), followed by food (16-19%) and utilities (12-17%).

The stability of healthcare costs might surprise those who believe that medical expenses would skyrocket later in life. The study cited earlier research indicating that most people incur a modest $6,800 in out-of-pocket medical costs during their final year of life. The average healthcare budget for people over 80 hovered around just 14%, compared to 9.4% for the youngest retirees. About 10% of the participants accounted for 42% of the late-life out-of-pocket healthcare expenditures, suggesting that long-term care insurance could mitigate much of this spending.