In retirement, rules of thumb are often a good starting point, but rarely are they the right answer for anybody. I’ve touched on one example at length in this previous blog post and video, and tackle another one here.
When people are trying to figure out what their expenses are going to be in retirement they’ll likely run into the 80% rule; this states that generally you will need approximately 80% of your pre-retirement income each year to live in the manner to which you were accustomed (while certain costs like healthcare may rise eventually, almost immediately others will go down or disappear entirely like retirement savings, commuting, eating out, etc. thus the reduction).
However, like with the 4% rule, changes in the retirement landscape make following this simple rule of thumb a little precarious: a higher percentage of people are entering retirement still carrying a mortgage and the rapidly rising costs of healthcare continue to be burden.
The Employee Benefits Research Institute (EBRI) recently released results of a study showing how household spending changed in the immediate years following retirement. They analyzed the spending patterns of a fixed group of households for up to six years after retirement. The summary of their findings are below, but what I found telling was the following:
“Although average spending in retirement fell, a large percentage of households experienced higher spending following retirement. In the first two years of retirement, 45.9 percent of households spent more than what they had spent just before retirement. This declined to 33.4 percent by the sixth year of retirement.”
Bottom line – a solid retirement plan works best when based on real numbers from real budgets. Though it may be tempting to assume you’ll fall in with the averages, doing so may be to your retirement’s detriment.
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Change in Household Spending After Retirement: Results from a Longitudinal Sample
From EBRI Issue Brief #420, November 2015
- The data show that household spending dropped at the beginning of retirement. In the first two years of retirement, median household spending dropped by 5.5 percent from pre-retirement spending levels, and by12.5 percent by the third or fourth year of retirement. But the spending reduction slowed down after the fourth year.
- Although average spending in retirement fell, a large percentage of households experienced higher spending following retirement. In the first two years of retirement, 45.9 percent of households spent more than what they had spent just before retirement. This declined to 33.4 percent by the sixth year of retirement.
- Households that spent more in the first two years of retirement were not exclusively high-income households; rather they were distributed similarly across income levels.
- In the first two years of retirement, 2 in 5 households (39.3 percent) spent less than 80 percent of their pre-retirement spending. By the sixth year of retirement, a majority (53.1 percent) of households did so.
- In the first two years of retirement, 28.0 percent of households spent more than 120 percent of their pre-retirement spending. By the sixth year of retirement 23.4 percent of households still did so.
- A very small percentage of the household budget was spent on durable goods. The median household (half above and half below) spent nothing on durables in retirement.
- Transportation spending showed the highest drop in the first two years of retirement. Median spending on transportation went down by 25.1 percent in the first two years of retirement, although the reduction in subsequent years was small.
- The median household had a mortgage payment before retirement but none after retirement.