Effective financial planning for retirement requires information about the spending needs of older households, how those needs evolve with age, and their variation by economic resources. This report finds that spending, adjusted for inflation, declines from age 65 through the retirement years. Spending declines not just among those with low wealth but even among households in the upper fourth of the wealth distribution.

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Spending Trajectories After Age 65

Variation by Initial Wealth

by Michael D. Hurd, Susann Rohwedder

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Research Questions

  1. How does total household spending, adjusted for inflation, evolve after age 65, as observed in longitudinal data?
  2. How do spending trajectories after age 65 vary by marital status, sex, and wealth, as observed near retirement?
  3. Under what circumstances are the observed spending trajectories a useful guide for financial planning for retirement?

There is a large body of work concerned with the importance of saving for retirement and with developing tools to facilitate and support the accumulation of retirement wealth. Much less attention has been paid to the decumulation phase—that is, the spending down of wealth following retirement. Understanding the decumulation phase requires information about the spending patterns of older households and how those patterns evolve with age.

The RAND Corporation has conducted extensive research on spending trajectories of older households. Building on this prior work, the authors provide statistics on household spending and its composition based on longitudinal data from the Health and Retirement Study. They present estimates of the trajectories of spending after age 65 among single and coupled households stratified by wealth holdings observed at or closely following age 65. According to the results, real spending declined for both single and coupled households. The rates of decline varied only modestly across initial wealth quartiles. The fact that spending declines broadly, even among those in the highest wealth quartile, suggests that the decline is not related to economic position. The authors discuss how the estimated trajectories can help with the prediction of households' spending needs at older ages.

Key Findings

  • Real spending declined for both single and coupled households after age 65 at annual rates of about 1.7 percent and 2.4 percent, respectively.
  • Real spending declined for all initial wealth quartiles, although with some modest variation.
  • The fact that spending declines broadly, including among those in the highest wealth quartile, suggests that the decline is not related to economic position.
  • The view that the decline in spending is not related to economic position is supported by an analysis of budget shares, the fraction of total spending devoted to subcategories of spending.
  • The budget share for gifts and donations increases with age, which suggests that economic position on average does not deteriorate with age, even as spending declines.

Recommendations

  • Financial planning for retirement should begin with determining spending requirements over the course of the household's retirement years.
  • In determining those spending needs, households, financial planners advising them, and policymakers should not rely on the common assumption that real spending will be constant or even increase, because this is not supported by estimates of spending trajectories based on household-level spending data.
  • Instead, households, financial advisors, and policymakers should use the observed rates of spending change to help determine adequate saving rates during the working life and affordable spending levels during retirement.

Table of Contents

  • Chapter One

    Background

  • Chapter Two

    Data: The Health and Retirement Study and CAMS

  • Chapter Three

    Spending Trajectories

  • Chapter Four

    Discussion

  • Chapter Five

    Conclusions

  • Appendix A

    Derivation of the Analytic Sample

  • Appendix B

    CAMS Spending Categories

  • Appendix C

    Determination of Initial Wealth Quartile

  • Appendix D

    Analytic Sample Size for Main Subpopulations

  • Appendix E

    Budget Shares by Initial Wealth Quartile and Age

  • Appendix F

    Spending Path Parameters, Median Regressions

  • Appendix G

    Sensitivity of Results to Estimation Method

Research conducted by

This research was sponsored by Insight Investment and conducted in the RAND Center for the Study of Aging, Social and Behavioral Policy Program, within RAND Social and Economic Well-Being.

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