Home-related expenses are the largest contributor to spending volatility during retirement, and they are five times more likely to drive spending volatility than health-related expenses according to a new white paper published today by T. Rowe Price.
Home-related expenses accounted for 25.1% of the variance in spending, while health-care expenses accounted for just 5.3%, according to T. Rowe Price’s data analysis.
The white paper analyzing data about spending increases and decreases in retirement years for households with less than $150,000 in annual income found spending volatility is largely driven by nondiscretionary expenses.
“The basic financial objectives of generating income for day-to-day expenses, maintaining liquidity, and growing assets remain true both before and during retirement,” said Sudipto Banerjee, Ph.D., vice president, retirement thought leadership at T. Rowe Price. “By planning for and being prepared to adjust to volatility in spending, retirees can increase their odds of success in retirement. And the retirement industry can play a key role in assisting with solutions that meet all these objectives and help retirees transition from the accumulation phase to the drawdown phase.”
Despite households experiencing an average annual spending decline of approximately 2% during retirement, the spending decreases in retirement are typically not uniform, with retirees experiencing meaningful ups and downs over time rather than a continuous decline.
One in every two retirees experienced an annual spending increase of up to 25% at some point during retirement; one in four households experienced a 25-50% spending increase; and over one in five households experienced spending increases between 50-100%.
Although the drivers of spending volatility can vary with household income levels, overall spending volatility was not correlated with investable assets or household income, suggesting that retirees of any level of investable assets or income could face a high level of fluctuation in spending.
In addition to the analysis, the white paper provides insights on managing and preparing for potential spending volatility, specifically noting the importance of generating cash flows and implementing retirement income solutions that incorporate liquidity and growth opportunities. In the case of home expenses, the paper also suggests that advisors can help retirees by recommending strategies that minimize unexpected home expenses in retirement, like completing extensive repairs before retiring or right-sizing to a newer home with fewer repair needs.
The study analyzed data from the Health and Retirement Study and its supplement, the Consumption and Activities Mail Survey, both from the Institute for Social Research at the University of Michigan. The sample tracked a nationally representative set of 1,306 retired households over the 14-year span between 2005 and 2019.
SEE ALSO:
• 5 Notable Participant Behaviors Identified in T. Rowe Price 401(k) Report
• Employers Anticipate Higher Health Benefit Costs for 2024
• Biggs: Social Security Exaggerates Shortfall of Retirement Income Replacement Rate
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
