The 5-Year ‘Test’

A report from the Consumer Financial Protection Bureau (CFPB), “Retirement Security and Financial Decision-making,” found that nearly half of all retirees lacked the ability to maintain the same spending level for five years into retirement. Additionally, two-thirds of younger retirees could not maintain the same spending level for their first five years of retirement. The study used survey responses from people who retired between 1992 and 2014, collected through the Health and Retirement Study (HRS)—a nationally representative panel survey of Americans over age 50.

The survey showed that the financial decisions people made while still working affected their later spending levels. For instance, 61% of homeowners without mortgage debt could retain spending vs. 55% with mortgage debt. Other reasons for unlevel spending included choosing a lump-sum payout instead of a monthly annuity at retirement and claiming Social Security at age 62.

The report analysis concludes that retirees’ reductions in spending, which, for many, are substantial, deserve to be examined further, as they raise questions regarding whether the reductions adversely affect retirees’ quality of life and/or essential expenses.

Can Participants Maintain the Same Spending Level in Their First 5 Years of Retirement?

Source: Consumer Financial Protection Bureau, Health and Retirement Survey