How Consumption Changes as Retirement Progresses

The traditional view is that retirees prefer steady consumption as they age, but research suggests that spending declines as retirement progresses.

Whether households prefer a constant, increasing or decreasing level of spending in retirement is important for financial planners to understand. It is often assumed that retirees would like to maintain a constant standard of living, but research suggests that retired households in fact decrease their consumption over time.

The Center for Retirement Research (CRR) at Boston College’s “Do Retirees Want to Consume More, Less, or the Same as They Age” study found that, overall, consumption declines as households age. The rate of decline was about 1.5% to 1.6% every two years, meaning that 20 years into retirement, consumption would be about 12% to 13% lower than at the beginning. This decline slightly speeds up later in retirement.

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According to the study, some reasons for the consumption change could be a decline in work-related expenses, as retirees no longer must spend on professional attire and commuting. Food expenditures decrease as retirees have more time to spend cooking and shopping for low prices. The last reason is that some people have been forced into involuntary retirement, and the study suggests that the negative shock of leaving work before planned can lead people to reduce their consumption.

While those three factors explain the change in consumption at retirement, they do not fully explain consumption changes during retirement. The study found that, if households have not saved enough to maintain their spending, consumption would obviously have to decline through retirement, regardless of household preferences. Those who made the most money saw their consumption decrease about 0.7% every two years, while those who made less saw their consumption decrease 1.6% to 2% every two years.

The second constraint the study looked at that may impact consumption patters is health. Households, for example, may want to travel or eat out more but are unable to due to health limitations. The study found that consumption for those in very good or excellent health decreases by about 1.3% every two years, while those who self-report good health or fair or poor health decreases by 1.5% and 3.1% every two years. The study also found that the consumption of households with poor health tends to tick up in later years, which might reflect higher late-life medical expenses.

The final constraint the study looked at involves the length of the retirement period. Those who expect to live longer may want to consume more slowly, while those who think they have a low probability of living to old age may want to front-load their consumption, the study suggests. However, since longer life expectancies are highly correlated with higher wealth, the study focused on the variation in consumption by health status and household type for those who had the most wealth.

The higher-wealth households who self-report very good or excellent health at retirement have a flat consumption pattern, declining by only about 0.6% every two years, while consumption for those who start retirement with good or fair or poor health declines by about 1.1% and 3.2%, respectively. The study also shows that some consumption increases later in retirement for those households in fair or poor health.

GAO Says SEC’s FINRA Oversight Lacks Sufficient Formality

A new report from the Government Accountability Office suggests the SEC’s performance metrics for FINRA do not measure progress in achieving a specific mission or set appropriate targets against which actual performance can be measured.

A new report published by the Government Accountability Office (GAO) calls on the U.S. Securities and Exchange Commission (SEC) to take further actions to improve its oversight of the Financial Industry Regulatory Authority (FINRA).

As the preamble of the report explains, both the SEC and FINRA are important entities when it comes to the smooth, transparent and unconflicted operation of the U.S. advisory and investment management marketplace. The SEC is empowered by Congress as a regulatory agency, while FINRA is what is known as a “self-regulatory organization” registered with SEC as a national securities association.

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All securities broker/dealers (B/Ds) doing business with the public in the United States—more than 3,400 firms with approximately 620,000 brokers—must be registered with FINRA, which writes rules to govern these firms and their representatives. It also examines for and enforces B/D compliance with FINRA rules and federal securities laws. Further, FINRA conducts market surveillance on all U.S.-listed and over-the-counter equities, as well as U.S.-listed options. Given the scope of FINRA’s regulatory responsibilities, the GAO says, ensuring that it carries out these responsibilities is critical to the SEC’s own mission to protect investors and to maintain fair, orderly and efficient markets.

The GAO report notes that SEC officials annually develop their FINRA oversight priorities using a risk-based planning approach, which involves consulting with relevant stakeholders and SEC staff—while considering resource constraints, ongoing activities and the findings of previous examinations. Though their reviews of FINRA are generally effective, the GAO report suggests some key ways in which they could be systematically improved.

“[The SEC staff] has indicators that its officials said it uses to measure performance in overseeing FINRA, but they do not reflect the characteristics of successful performance measures that we identified in prior work,” the GAO report states. “More specifically, [the SEC’s] performance metrics do not measure progress in achieving a mission, set targets against which actual performance can be measured, incorporate key elements of its oversight activities, or provide outcome information that would allow it to assess its performance in overseeing FINRA. Instead, [the SEC staff’s] performance measures focus on the completion of internal program activities.”

The report says SEC officials stated that their periodic meetings with FINRA “were useful and served as an important component of its FINRA oversight” by providing them with valuable details to supplement the information they obtained through inspections and examinations. However, according to the GAO report, these measures only assess whether a meeting has occurred, meaning they do not assess the outcomes of the meetings or demonstrate how they contribute to the SEC’s oversight goals. Similarly, the GAO suggests, the measures are not useful in assessing progress in meeting goals or improving performance.

“For instance, while [the SEC’s] measures related to processing of tips, complaints and referrals, and implementation of the annual oversight plan track completion of important oversight activities, they do not provide information on how well the staff performed those activities,” the report states. “Decisionmakers would be unable to use the existing measures to assess whether oversight activities achieved satisfactory results in terms of accomplishing mission goals or objectives, and what changes would be necessary to improve performance.”

The GAO researchers acknowledge that developing outcome-oriented measures can be challenging, but they say it is important that agencies strive to establish performance measures consistent with leading practices so that agency management can track progress toward achieving its mission. Although some outcome-oriented performance measures may have known limitations, they also may provide more useful information than measures that do not reflect leading practices and therefore may be ineffective at monitoring performance, they suggest.

“Without documented policies and procedures, [the SEC staff] lacks reasonable assurance that it has correctly and consistently identified and communicated its most important findings internally and to FINRA,” the report continues. “Instead, its informal process operates on an ad hoc basis that relies largely on verbal discussion at meetings. More systematically identifying significant findings would provide the SEC with relevant information for its prioritization and planning of future oversight activities, as specified in the SEC examination manual; help the staff clearly communicate its concerns to FINRA, instead of relying on FINRA’s interpretation of the relative significance of findings in deficiency letters; provide potentially useful information for the implementation of outcome-based performance measures and tracking of deficiencies and corrective actions; and help provide assurance that the SEC is achieving its strategic goal of effectively informing stakeholders of key regulatory information.”

From there, the GAO report concludes with three main recommendations.

The first is that the director of the SEC’s Division of Examinations should develop performance measures that reflect leading practices embraced by other federal regulators, including measuring progress in achieving its mission, setting targets against which actual performance can be measured, incorporating key elements of oversight activities and providing information on the outcomes of reviews.

Second, the GAO says, the director of the Division of Examinations should develop and implement specific policies and procedures for tracking identified deficiencies and associated FINRA corrective actions, including establishing when and how to monitor findings and FINRA’s implementation of corrective measures.

The final recommendation is that the director of the Division of Examinations should develop and implement specific procedures to identify and communicate the significance of its inspection and examination findings.

The full GAO report is available here.

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