Estimating exactly how much you’ll need to enjoy a comfortable retirement has never been easy, as our spending habits will inevitably change as we move through our later years. But now a new report from the Institute for Fiscal Studies has shed new light on these shifts.
The report, authored by Rowena Crawford, Heidi Karjalainen and David Sturrock, examined the spending patterns of current retirees in the UK using data from the Living Costs and Food Survey, from 2006 to 2018, giving them a detailed picture of retired households’ spending patterns, including how spending patterns differ between different types of households.
“Desired profiles of spending in retirement are a key ingredient in how fast funds should be withdrawn,” they emphasise, not least because “whether people prefer a constant, increasing or decreasing profile of spending through their retirement will affect the kind of income profile they should aim for.”
So what were some of their key findings?
- On average, retirees’ total household spending per person remains relatively constant in real terms through retirement, increasing slightly at ages up to around age 80 and remaining flat or falling thereafter.
- However, when you drill down into those figures, average household income per person for retirees aged 62 and older is more clearly increasing in real (CPI-adjusted) terms as people age, driven by private pension incomes increasing faster than the Consumer Prices Index (CPI) and by increasing numbers of people receiving the state pension and disability benefits as they age.
- The composition of spending changes as people age, with per-person spending on food inside the home and on motoring falling steadily, spending on holidays increasing up to age 80 and then decreasing, and spending on household services (which includes spending on home help and domestic cleaning) and household bills increasing in later years of retirement.
- There are differences in spending patterns across different types of households. Households with above-average incomes for their age and birth cohort have an increasing profile of spending in their 60s and 70s, with spending falling slightly for those in their 80s. On the other hand, those with incomes below-median have a slightly declining age profile of spending in their 60s and spending remains flat at older ages.
- These results suggest that, on average, in order to have an income profile that would match the age profile of spending through retirement seen among earlier cohorts, people should aim for a total income profile that is roughly constant in real (CPI-adjusted) terms through retirement. This means that for those largely reliant on private pension income, a non-index-linked annuity would leave them more exposed to inflation and t
hey may not be able to maintain the level of spending they would like in retirement.
- When thinking about future spending needs, households need to consider how changes in circumstances, in particular the death of a partner, will affect income and spending in order to ensure that resources are available to fund increases in per-person spending. Future retirees, who are less likely to have occupational or state pensions with a survivor’s benefit, will have to decide how to take this into account when deciding the speed of drawdowns and whether to buy an annuity that provides survivor’s benefits.
- Later-born generations spend more at the start of retirement on categories such as leisure services and holidays and less on categories such as food inside the home, which tend to decrease with age. This might mean that the spending of younger, and future, generations of retirees could grow more strongly with age than is the case for current retirees.
- In conclusion, if the spending patterns of current retirees are a good guide to how people in the future will want to spend, current savers might be best advised not to plan their retirement savings on the basis that their overall spending will fall sharply during retirement.
The link for the full report is:
Remember: if you think that these findings have made you rethink your retirement spending projections, it’s easy to adjust your RetireEasy LifePlan to take account of a whole series of different scenarios.