Will Spending Really Go Down in Old Age?

One of the first things I learned upon wading into the world of FIRE was that the majority of traditional financial advice is off-base and irrelevant for those pursuing aggressive savings and retirement before 65. The rules of thumb cited by major media sources are targeted largely at mainstream consumers who live paycheck to paycheck, spend 90 to 110% of their income each month, and will be lucky to have much of anything saved by traditional retirement age.

And, oh, do I love to trash them:

“Allocate 50% of your income to necessities, 40% to ‘wants,’ and 10% to debts and savings”

Garbage. If you don’t want to have to work until 65, adjust your lifestyle until you’re saving 30, 40, 50% or more.

“Plan for a retirement spending level of 80-85% of pre-retirement income”

Nonsense. Your retirement spending target should be based on spending projections rather than your current income.

“’Snowball’ your consumer debt repayments in order from smallest to largest”

Completely inefficient. Pay down debts in order of interest rate, unless closing accounts is the only source of motivation that will keep you disciplined.

It surprises me, then, that there’s a major financial assumption I see tossed around constantly – yet rarely analyzed and rarely questioned:

“People tend to spend less as they get older.”

Though I’ve yet to come across an early retiree whose savings target actually included an assumption for reduced spending in the later years, I see people mention it frequently as a comforting reassurance – “Hey, if the 4% rule doesn’t hold up, at least we know that most people spend less in old age anyway.” I’ve been as guilty as anyone in quoting this statistic.

In our defense, unlike the media-spouted rules of thumb above, this one is actually fact-based when looking across the U.S. population. According to the 2013 Consumer Expenditure Survey by the Bureau of Labor Statistics, average annual household spending peaked at $60,524 for consumers aged 45-54, then decreased steadily to just $34,382 for consumers ages 75 and older.

Everyone from CBS News to Fortune to Time Magazine is thrilled to report the news, of course: you don’t need as much saved for retirement as you think! Hooray, time to put that Caribbean cruise on the credit card!

For early retirees, though, there’s a problem: these data are based on the behavior of typical U.S. consumers, not people already living frugally and banking a significant portion of their income.

The average 45-54 year old is a big spender

After a few decades in the workforce, our average 50-year-old consumer has picked up all the trappings of a textbook American life: a high five-figure income, a big house in the suburbs (with corresponding big mortgage), two or three cars in the garage (likely with a loan or lease payment), a long and expensive commute to that great job, and a reasonably large budget for everything from clothing to entertainment to the kids’ college educations:

Average household characteristics, 45-54:

  • Age of reference person: 49.7
  • Pre-tax Income: $78,879
  • Children Under 18: 0.6
  • College-Age Children: ~0.8
  • Vehicles: 2.2
  • Homeowner: 69% (72% of whom have mortgage)

Average household expenses, 45-54:

  • Total Spending: $60,524 ($5,044/month)
  • Housing: $19,001 ($1,583/month)
  • Food: $7,907 ($659/month)
  • Transportation: $10,782 ($899/month)
  • Healthcare: $3,801 ($317/month)
  • Clothing: $1,826 ($152/month)

For many people pursuing early retirement through frugal living, these spending numbers will seem high, but they’re exactly what I would expect for a typical consumer whose lifestyle has inflated with income. The end result is a savings rate of less than 10%. For me, this isn’t a relevant starting point for assessing changing expenses in old age.

For the average consumer, spending does drop with age

Now let’s look at what happens when our 50-year-old ages another 30 or so years:

Average household characteristics, 75+:

  • Age of reference person: 81.6
  • Pre-tax Income: $34,097
  • Children Under 18: < 0.1
  • College-Age Children: < 0.1
  • Vehicles: 1.3
  • Homeowner: 79% (15% of whom have mortgage)

Average household expenses, 75+:

  • Total Spending: $34,382 ($2,865/month)
  • Housing: $12,314 ($1,026/month)
  • Food: $4,144 ($345/month)
  • Transportation: $5,149 ($429/month)
  • Healthcare: $4,910 ($409/month)
  • Clothing: $768 ($64/month)

Over the course of 30 years, our average consumer’s spending has dropped substantially. There are a few logical explanations for part of the decrease. One driver, of course, is the elimination of career-related expenses such as transportation and clothing. Housing expenses have dropped substantially, too, perhaps a combination of a paid-off mortgage and an empty nest downsizing. The only category in which we’ve seen a spending increase is healthcare.

Where's the $5,000 line item for golf?

Where’s the $5,000 line item for golf?

Another major explanation for the drop in spending, though, could be this: the average retiree can’t afford his or her pre-retirement lifestyle. Just because the statistics show that older consumers spend less doesn’t mean that they would prefer to spend less. Do people’s spending choices really change with age, or are they forced to change by necessity? The typical American consumer spends based on what he or she earns. For older retirees with little savings remaining, spending ability is reduced dramatically. The numbers might support my theory, with mean 75+ income ($34,097) nearly equivalent to mean 75+ spending ($34,283).

(If anyone has more data or research on this topic, I’d love to see it.)

…and the healthcare numbers are incomplete

Perhaps the most misleading data point in the BLS tables is the healthcare spending figure for elderly consumers. As indicated in the footnotes, “The CE is designed to represent the slightly smaller U.S. civilian noninstitutional population and excludes those living in an institution, such as a nursing home…”

For most retirees, early or traditional age, healthcare expense is the biggest wild card. This exclusion is not trivial. My quick estimate based on BLS and Census data is that out-of-pocket consumer nursing home care represents an additional ~$3,900 of annual expenditures per 75+ household. Perhaps it’s offset somewhat by reductions in other expenses.

Most frugal early retirees will have many fewer expenses to cut

When I evaluate my own spending habits today, I can’t imagine experiencing the same magnitude of spending decreases as the average consumer. Cost-wise, there’s not much downgrading to do from a <600 square foot apartment. I could trade fresh fruits and vegetables for Hamburger Helper and ramen, but I’d rather not. I already spend next to nothing on commuting, so there won’t be a big impact there, either.

If anything, I suspect my expenses will go up in major categories. My healthcare expenses are next to nothing today; can I really count on that forever? And forget cooking; I want to dine out more often! I expect that I’ll still want to travel regularly, too, but how many people in their seventies and eighties have the patience and energy to explore the back country looking for free campsites? When was the last time you saw one in a cheap international hostel? Our patience and tolerance for our frugal travel lifestyle may quickly wane – I think I’d rather stay at the Westin.

For these reasons, I’m not counting on any reductions in real spending over time. If anything, my current projection of stable inflation-adjusted spending over time might even be overly aggressive. This may not be the case for all early retirees, but I think it’s worth careful evaluation, especially among the frugal crowd, whose expenses are far more optimized than the average consumer’s.

Have you projected your long-term expenses? How do you think they’ll change?

27 Comments

  1. I couldn’t agree with you more. Average Joe at 75 isn’t spending much money because HE HAS NONE. He’s probably living off social security and maybe a small pension from his career at that point. It’s not a choice, it’s out of necessity.

    I think a good hedge for use FIRE people is to not count on social security (even though it’ll still be there in some form). And then that extra income starting at 70 or so years old will take care of the increased costs of our health needs and the like.

    • Great point about Social Security, Fervent. I rarely see early retirees incorporating any government retirement benefits into their projections, but I agree that it will very likely still exist in some form down the road.

  2. GREAT article, and thank you for addressing head-on some of the fallacies that many other people buy into. I agree with you that healthcare is the largest wild card in retirement by far, and I think too many people assume that Medicare will cover what they need, when there are a lot of expenses not covered by Medicare. I get nervous when I read about the extreme FIRE bloggers who are retiring at super early ages assuming that their expenses won’t ever go up. Uh, yikes! Make sure you talk to some elderly people first! I genuinely hope that they never need long term 24-hour care, because living in a full time care facility is very expensive, and most people want to stay in their own home at all costs with caregivers coming to them, which is multiple times more expensive.

    Also, I wholeheartedly agree about retirement being the time to live it up. That’s my whole philosophy: work my butt off and live cheaply now, and stay at nicer hotels and travel to fun places in retirement. I don’t see any advantage in pulling the rip cord on retirement super early, just to end up eating tuna fish on Ritz crackers for the next 50 years. If that’s what someone genuinely wants, then that’s totally fine. But I worry that they might get 20 years into that lifestyle and then decide “oops–I should have worked longer,” because it’s going to be that much harder to re-enter the workforce after being early-retired for a long time.

    • Thanks for your comment, Yeti! The healthcare costs are particularly concerning for me, too: my grandmother, who died of Alzheimer’s Disease, was in memory care for years at an annual cost of over $70k for room, board, and 24-hour care alone. I shudder to think of what would have happened (or the additional burden it would have placed on our family) if she hadn’t saved enough to afford it.

      In terms of retirement spending, I’ve pulled the plug on full-time work relatively early (certainly before I can afford extravagant hotels and the like) but plan to keep enough side hustles going while I’m young to keep padding the investment accounts.

      • That’s a great way to do it: retire from the main job, but keep the side hustles flowing. You can always ramp up or down from there, as life changes. I’m sorry about your grandmother, but thank goodness she was financially prepared!

  3. To your point, it’s too bad the data isn’t broken out based on preference. My parents are in their early 70’s and have always lived frugally. In the early years of their retirement, they would take road trips lasting many weeks at a time. But within the last couple years they’ve had health problems, keeping them at home. I know they’d be willing to spend more but can’t, so their expenses have dropped.

    I’m guessing I’ll spend more than I do now (spending for 2015 was under $18k total) when I retire at 50, mainly on healthcare and travel. I won’t go on a spending binge but I wouldn’t have a problem spending an extra few thousand dollars to see more of the world each year.

    I’d like to think my expenses will go down once my body slows down but at that point I’ll likely need to be in a nursing home and that definitely isn’t cheap!

    • I see that tendency in my older family members, too — even if they would like to spend more, limited mobility keeps them living relatively frugally by necessity. I figure if I have excess cash at that point, I’ll be happy to donate it to good causes — but better to have the option!

  4. These sorts of stories also assume that the mortgage goes away in retirement, that you’re no longer paying for the kids, etc. I don’t really see many expenses I have that would go away in retirement. If anything, I would probably spend more money on healthcare and I would experiment more in the kitchen so groceries might go up. My mortgage will be gone in retirement but that’s already factored into my figures. FF’s point about Social Security is a great one!

    • Yes, exactly! My projections are already sans mortgage, college tuition, etc., so I don’t see any that are likely to go away in the future.

  5. Very good thoughts Matt.

    The only reason people spend less in retirement is because they spend less, not some magical fairy that makes it possible to travel around the world on $100. I think the one huge change that the elderly can see is that they’ve paid off their house, so of course that is the biggest part of the budget, therefore their expenses are less.

    We will only be able to spend what we have saved in the future, the Govts of the world cannot afford to give out free money to a huge section of society whilst the work base decreases unless they have a specific fund like Norway does.

    Tristan

    • Thanks for your comment, Tristan. Social security retirement benefits would be a nice bonus in retirement, but I’m certainly not counting on any!

  6. Good article to reflect on expenses in the future.

    In our projections on expenses, I use in general the same expenses that we have now, as I do not want to alter my life style. I adjust for kid related expenses. Some years they will go up, and the suddenly they should drop to 0. The mortgage is part of the equation as well. In 9 years, it drops to 0. This should happen before retirement.

    For now, I assume no change in housing style. Although I think that might happen in reality. When the kids are out of the house, we could do with a smaller one.

    From reading the above comments, I also think that travel and other entertainment expenses tend to drop when getting older. IT becomes more difficult to travel the world multiple times per year if you start to feel more age related stuff. In fact, it is a subject I discussed with out neighbour recently. She is 70+ and now still goes out a lot. She mentions that some of her friends stay home more due to the discomfort.

    • I like that approach, amber, and I do think there’s potential for some of our dining out and entertainment to drop eventually — perhaps up for a few years and then down in truly old age.

  7. LOL – “Hooray, time to put that Caribbean cruise on the credit card!”

    These are really interesting numbers. I don’t doubt that my husband and I can keep spending low in the future. The questionable variable is the kids. We have three right now and plan to have a fourth. They don’t really cost that much right now, but I worry about their expenses when they get to be teenagers involved in sports and other activities. Of course, we will encourage them to get jobs to help pay for clothing and whatever new-fangled electronics are popular by that time. It’s just hard to predict as that is new territory for us.

    • Kids’ expenses are a huge wild card, especially as they get older. I like your thinking on encouraging them to pay for the extra expenses.

  8. This is great post. What my wife and I have been doing in figuring out our future expenses is try to figure out where we would like to end of retiring. We see Las Vegas as the retirement place. We’ve lived in Vegas for a year and the cost of living was really cheap and is still cheap according to my friends. When we retire there, I see no car expenses because public transportation is reliable.

    In addition, I see health insurance as covered because the company I work for is stable and guarantee to give you a health insurance coverage as long as you have been in the company for at least 5 years prior to retirement, which is I am planning to retire from that company because I love my job and I like it there. (Hopefully, it will be the same scenario in the future).

    • Thank you, Allan! That’s awesome that you’re liking Vegas. Retiring in a low COL spot is huge. After our recent trip to San Francisco, I was laughing to myself thinking about how I wouldn’t be remotely close to FIRE if I were planning to live there. It’s a great place to live, but not worth years and years of work!

  9. So many things I love about this post! I love that you did the research and pulled the numbers. And that you asked the chicken-or-egg question that has always gnawed at me: Do older people spend less because they want to, or because they have to, because they followed that crappy financial services industry advice to say only 10% of their income? (Or because their pension disappeared — that’s certainly true for plenty of older people these days.) I can already see plenty of ways we’ll *need* to spend more when we’re older. We don’t have kids who could look after us, so we’ll likely have to pay for home repairs that we currently tackle ourselves, even if we live in a drastically smaller home than now. If we stay in the mountains, will we be able to shovel our own snow (if global warming doesn’t take all the snow away by then)? We’ll certainly have higher health care costs. And if we do travel, we probably won’t be interested in sleeping on the ground or on a plastic-coated hostel mattress. We’re planning for much higher spending from age 60+ for all of these reasons. We will have 20+ years of more “frugal” living (not really frugal in the true sense of the word, but you know what I mean) under our belts by that point, so I don’t see us just blowing that money frivolously. But knowing that we can take care of our basic needs and comforts and not scrape by will give us huge peace of mind!

    • That’s a great point. It’s not just travel and food and the like that may increase; there are also a bunch of DIY tasks that we may not be able to do in the future. I think your “two phase” plan is solid — and if you end up with extra cash, you can always really live it up or support causes you care about.

  10. thejollyledger

    April 27, 2016 at 4:54 pm

    We won’t have a large reduction in expenses in early retirement either. I think our biggest reductions will be commuting costs, car costs (reduce to one), phone costs (reduce to one). So maybe we are talking ~$5000 per year. I would also like to increase our food spending and travel budget, and of course healthcare! My plan keeps my spending the same though, at least until the mortgage is paid off. Then the expense drop by half!

    • Those car costs really add up. When we settle down geographically again, my goal is to go entirely without a car if possible. In the right city with public transit and the occasional Uber/Lyft or Zipcar, it’s really not too big of a challenge.

  11. I agree with you, most of the financial advice today is targeted to unfinancially fit people. Logical financial advice would be boring and unmotivationial for the average person, so the media and financial “gurus” package half-a$$ financial advice & info to make it easier to sell to these types of people.

  12. Hope all is well in your travels! We continue to try to live frugally now, but we’re planning to increase the number of income sources as we age rather than have to resort to cutting expenses later!

    • Thanks, Claudia! I like that approach. I don’t worry about truly running out of money in FIRE so much as having to cut back on spending prematurely.

  13. Great post. These are issues that are glossed over a bit in the FIRE community. If you spend your whole life maximizing efficiency (frugality) I’m betting spending levels don’t drop as much in retirement. As you state there is just not enough waste to cut out of the budget.

    Health care is the big unknown, especially before medicare kicks in. It’s amazing how a big accident or other bad health luck can blow up a budget. Unfortunately in the US this is difficult to hedge against.

    • Yeah, that unpredictability makes it very hard to plan. My ideal outcome would be keeping our average withdrawal rate low over the coming decades to build up a little more buffer for these wild card expenses.

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