Sudipto Banerjee

In a finding that appears to go against conventional wisdom around retirement planning, retiree spending declines annually by approximately 2%, according to a new white paper compiled by global investment management firm T. Rowe Price. 

“This finding is significant because conventional retirement income planning assumes that retirees want to maintain a certain standard of living or a certain level of spending,” wrote report author Sudipto Banerjee, Ph.D., vice president of retirement thought leadership at T. Rowe Price. “However, the data suggests that retirees tend to adjust their spending to match their income so that they can avoid drawing down their assets.”

In particular, the analysis reveals that retirees choose to adjust their nondiscretionary spending, for items such as food and shelter, to match their guaranteed income from Social Security or pensions, challenging the notion that these expenses are truly fixed. As a result, understanding personal preferences between asset preservation and lifestyle or spending preservation is critical to retirement income planning, Banerjee said.

The analysis also examined the annual spending trends for households in the top 20% and bottom 20% of net worth. These households had a net worth of more than $667,000 or less than $37,000, respectively. Banerjee found that two different patterns emerged:

  • Spending for the top 20% dropped rapidly after age 65, remaining mostly flat between 70 and 80 years old, and then it declined rapidly again. Spending for the bottom 20% remained largely flat, however.
  • Median spending dropped at a much faster rate for those in the top 20%. The annualized decline in real household spending is 2.7% compared with only 0.3% for the bottom 20%.

“The personal nature of spending in retirement makes one-size-fits-all solutions elusive,” he wrote. “Households in the top 20% net worth have greater discretion to adjust their spending to match their income than households in the bottom 20% net worth. Thus, contrary to conventional wisdom, less wealthy households might benefit more from additional guaranteed income.”

T. Rowe Price’s analysis used data from almost 1,500 households interviewed for the Health and Retirement Study and its supplement, the Consumption and Activities Mail Survey, produced and distributed by the University of Michigan.