Household Spending Decreases with Age

Housing is the biggest spending category for every age group, according to EBRI’s findings.

Household spending decreases with age, according to the Employee Benefit Research Institute’s (EBRI’s) study of the Health and Retirement Study and the Consumption and Activities Survey for older Americans between the ages of 50 to 64, 65 to 74 and 75 and older, between 2005 and 2017.

EBRI notes that a common approach to planning for retirement is to assume that people should spend a certain level of pre-retirement income for every year throughout retirement. “However, evidence from actual retiree spending patterns challenges this assumption,” EBRI says in its issue brief, “How Do Retirees’ Spending Patterns Change Over Time?” “A series of focus groups and surveys conducted by the Society of Actuaries and their partners found that the spending patterns of early versus late retirees differed dramatically.”

The reason for this, EBRI says, is that when a person first retires, they have time for hobbies, which could be expensive, like golf, and for socializing, which includes eating out at restaurants. Once a person has been retired for 15 years or more, they begin to cut back on their spending, due to inflation eating into their savings.

EBRI found that the average household expenses for those 50-64 were $55,000 in 2005. In that same year, they were $43,000 for those 65-74, which was 22% less. For those 75 and older, total household expenditures were $33,000, or 23% less than the 65-74 age cohort and 40% less than the 50-64 age cohort. This pattern was consistent across all survey years.

Housing was the greatest expense, both in terms of dollar terms and share of annual spending. For those 50-64, it ranged from $23,000 to $25,000 a year. For those 65-74, it ranged from $17,000 to $21,000 a year, and for those 75 and older, the range was $13,000 to $18,000 a year.

While there are minor differences in the proportion of total good expenditures among the different age groups, households spent less on food as they grew older, ranging from a high of $5,000 to $5,500 for the 50-64 age group to a low of $3,000 to $4,000 for the 75 and older age group. Average spending on food for those between the ages of 65 and 74 ranged from $4,400 to $4,900.

Not surprisingly, the share of household budgets devoted to health costs increased with age. However, the average and median dollar amounts did not show large variations across age groups in any given year. Those 50-64 spent between $4,100 to $4,500 on health care. Those 65-74 spent $4,100 to $4,700, and those 75 and older spent $4,000 to $5,000.

Transportation expenses declined with age both in dollar terms and in share of total spending. Those 50-64 spent between $6,700 to $8,200 a year on transportation. Those 65-74, $5,000 to $5,700. Those 75 and older, $2,900 to $3,800.

Clothing expenses also declined, from a range of $1,400 to $1,800 for the 50-64 age cohort, to a range of $1,200 to $1,500 for the 65-74 age cohort, to $911 to $1,200 for those 75 and older.

Entertainment expenses also declined, showing a major drop-off for those 75 and older. They ranged from $4,500 to $5,400 for those 50-64, to $4,100 to $5,400 for those 65-74, to $2,500 to $3,600 for those 75 and older.

Contributions also ticked downward, but only so slightly. They ranged from $2,900 to $3,400 for those 50-64, to $2,700 to $3,600 for those 65 to 74, to $2,700 to $3,200 for those 75 and older.

In conclusion, EBRI says “people spend more early in retirement and gradually decrease their spending as they age. This research also suggests that retirees are adept at adjusting their consumption as need in order to fit their circumstances, such as reducing spending in times of a market downturn or recession. Indeed, those ages 75 or older were spending on average a third less than those ages 50-64.”

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Co-Founder of XY Planning on Why His Firm Has Sued the SEC Over Reg BI

The rule blurs the line between advice and sales, potentially hurting both advisers and investors, he says.

XY Planning Network co-founder Michael Kitces says he filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) seeking to derail its Regulation Best Interest (Reg BI) on behalf of the best interests of registered investment advisors (RIAs) and the protection of consumers.

Kitces, whose firm is the lead plaintiff in the case, says Reg BI permits broker/dealers (B/Ds) to put their interests ahead of clients in several ways. “First and most directly, it literally has no provision that requires B/Ds to mitigate their conflicts of interest,” Kitces says. “Under Reg BI, brokers themselves have an obligation to mitigate conflicts of interest and act in the best interests of customers when making a recommendation, but brokerage firms themselves only have to disclose but not mitigate them.

“The second challenge to this, which is a bit more pernicious, is that the SEC blessed dual registrants, that is, allowing people who are an RIA and a B/D—the latter legally being a product salesperson—to switch hats anytime they want without clearly disclosing this to clients,” Kitces continues. “So, a dual registrant may be giving advice to a client and then, without making it clear to the client because they continue to use the ‘financial adviser’ title, switch hats to being a B/D and then sell them products. The problem is the client doesn’t know when the adviser stopped being an adviser because [he] can say [he’s] an adviser throughout the whole process.”

The bottom line, Kitces says, is that “while the SEC thinks it improved the standard—and in many ways this is true—the real problem is that it redrew the dividing line between an RIA and a B/D, which is why we have sued the SEC and are challenging the rule.”

Kitces maintains that broker/dealers who are providing advice and then subsequently selling products to clients will not, actually, be held up to a higher standard. Instead, he says, the SEC “essentially reduced the standard for broker/dealers who provide advice but have conflicted interests and are selling products.”

Congress has set forth two ways that the SEC can fix this problem, Kitces says. The first is the Dodd–Frank Act of 2010, which says that brokers should be held to the same fiduciary standards as financial advisers when providing advice. The second is the Investment Act of 1940, which states that a B/D cannot give advice in the first place and must register as a registered investment adviser (RIA) instead.

Besides blurring the lines between RIAs and B/Ds, Kitces says, Reg BI puts organizations that support RIAs at a disadvantage to organizations that support B/Ds.

In sum, he says, he doesn’t “think B/Ds should give advice and be held to a fiduciary standard. Let them continue to run the mechanics of how markets work, conducting trades and initial public offerings. Let brokers be brokers and advisers be advisers. The SEC put out a rule in 2005 that unequivocally said that if a broker were to give financial planning advice, [he] would have to register as a RIA and be a fiduciary. The rule got vacated in a lawsuit in 2007 for unrelated reasons. We say, bring back the 2005 rule on financial planning advice.”

Ford Financial, the second plaintiff in the case, says it is deferring all questions to XY Planning Network, but released this statement: “We are proud to stand up for our fellow fiduciary advisers and the people we serve. Money implicates our deepest values, hopes and fears. When receiving comprehensive financial planning advice, consumers deserve the utmost clarity on the nature of the advisory relationship.”

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