the romanian mob
photo credit: jonrawlinson

New research on retiree spending habits may aid financial advisors with retirement income planning.

One study by The Sun Life titled The Expense Reality shows that retirees do follow some spending patterns.  Michael Kitces of Kitces.com’s Nerd’s Eye View blog does a good job of summarizing the study in his blog post: Does extra retirement spending follow a consistent aging sequence? Some of the highlights from his blog include:

“domestic and international travel is higher for retirements in their 50s and 60s and trails off for those in their 70s and 80s…international travel tends to trail off earlier (for retirees in their 70s), while domestic travel spending tends not to drop significantly until the retirees reach their 80s.”

“Hobby expenses are often higher in the early retiree years, as are new/second business start-up expenses, which trail off in later years.”

“a very significant leap in luxury item spending for those in their 70s, almost double the spending in this area for those in their 50s and 60s, before it drops even more significantly for those in their 80s.”

“those in their 80s tend to have the strongest charitable giving activity, followed closely by those in their 60s.” 

From these points is appears that spending shifts as retirees cross off some of the items on their bucket list.

Another study summarized at Bogleheads.org concludes that retirement spending tends to drop around 14% immediately after people quit work, and continues to fall as retirees age into their late 70s. Interestingly enough, only 53% of the households followed this pattern of spending. Another 35% of households spent close to the same amount in retirement as they did in their later working years. Another 12% spent more in retirement.

Figuring out which type of retirees spent the same in retirement and which 12% spent more in retirement could aid financial planners’ retirement planning exponentially. If planners knew someone was going to spend less going into retirement, they could set up a higher withdrawal rate. Conversely, if planners knew which retirees would spend more, they could set up a lower withdrawal rate.

Look for more studies, as this new area of research would impact everything from tax planning to long term care planning, and everything in between.