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.

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.