Retirees of All Income Levels Reduce Spending Over Time, per Study

Previous research has found that retirees often underspend their resources, but a study published last month in the Financial Planning Review, “How Spending Evolves in Retirement: A Smile, a Smirk, or Something Else?” suggested that retirees tend to reduce spending over time, regardless of income level.

Many retirement research and financial plans assume a “constant spending” rate by retirees, one which only increases to match inflation. The study’s author, David Blanchett, Prudential Financial Inc.’s head of retirement research, used data from the RAND Corp.’s Health and Retirement Study and found that, adjusting for inflation, U.S. retirees’ average spending resembles a U-shaped “smile”: Higher spending at the beginning of retirement is matched by greater healthcare costs at the end of life. However, the median retiree in the study follows a “smirk” pattern of spending, in which an initial sharp decline in spending gradually lowers over time, with no increases at retirement or the end of life.

Analyzing the 2024 Consumer Expenditure Survey, released by the Bureau of Labor Statistics, Blanchett found that consumers age 75 and older spend roughly $53,000 annually, compared with the highest spenders, 45-to-54-year-olds, who spend more than $97,000 annually. As consumers enter retirement age, his analysis showed that a larger percentage of their purchases were for healthcare and housing, with lower percentages spent on transportation, insurance and pensions.

Comparing average annual changes in spending levels among retirees who were evaluated to be underfunded, funded or overfunded to their retirement cost estimates, the study only found spending increases among the most well-funded retirees who spent at lower levels. Given that all the other retirees decreased their spending, Blanchett concluded in the study that “spending tends to decline in real terms, even among those who have the resources to potentially spend more.”

Blanchett wrote that advisers can replace the constant-spending assumption in their retirement-income forecasts with one of decreased spending. Using the constant spending model and assuming a moderate level of income risk aversion, Blanchett estimated that the initial withdrawal rate would be 5.2%. A “smile” spending model would have a 6.2% initial rate, and a “smirk” spending model would have a 6.4% rate—approximately 20% higher than the constant spending model.

He also wrote that retirement spending does not have to adjust in lockstep with inflation, since most retirees get a public benefit, such as Social Security, which is inflation-adjusted and can provide “some, if not all, of the explicit inflation protection required during retirement.”

Lifetime income solutions such as fixed annuities could appeal to seniors with a “solid base of Social Security retirement benefits,” according to the study, given the tendency of those retirees to decrease spending and their Social Security likely to rise in step with inflation.

Blanchett admitted in the study that healthcare risks are a “clear wild card,” when assessing income needs in retirement and that his study’s sample of households does not account for individuals with factors such as an unstable marital status or outlying spending changes. He also wrote it is unclear how retirees living and working longer will impact retirement spending. But he argued that models making reduced spending assumptions will lead to improved decisions about portfolios, withdrawal rates and allocations to lifetime income.

“The more [that] widely reduced real spending is leveraged in retirement research and financial planning tools, the more realistic the guidance is going to be!” Blanchett wrote.