A recent report from the Consumer Financial Protection Bureau (CFPB), “Retirement Security and Financial Decision-making,” found that, of those surveyed, nearly half of all retirees did not have the ability to maintain the same spending level for five years after retirement. Additionally, two-thirds of younger retirees could not maintain the same spending level for five years after retiring.
The National Institute on Retirement Security (NIRS) held a webinar to discuss the findings. Hector Ortiz, a senior policy analyst at the CFPB’s Office of Financial Protection for Older Americans, said the report found that while younger retirees tend to spend more in the first years of retirement, this typically declines as they age. “People’s needs as they spend their years in retirement change and, commonly, the spending needs tend to decline,” he said during the webinar.
The survey contrasts a 2019 study by the Employee Benefit Research Institute (EBRI), which found a majority of retirees had low spending-to-income ratios. In the study, EBRI found housing expenses were by far the largest item in all groups’ budgets, accounting for 48% of total expenditures. A PwC survey reported 49% of participants said they had difficulty meeting household expenses each month.
The CFPB survey showed that most financial decisions were associated with the ability to maintain spending levels, one being homeownership in retirement. Those who entered retirement with a mortgage debt were less likely to retain spending. Other reasons for unlevel spending include choosing a lump-sum payout instead of a monthly annuity and claiming Social Security before age 62.
Perhaps unsurprisingly, the study showed that retirees who were unable to preserve the same spending level after retiring reported large reductions in their spending as they aged, and decisions about debts, pensions and Social Security were related to their ability to maintain spending levels. Seventy percent of those unable to maintain spending had claimed Social Security before age 62, and only 35% of those who filed for benefits after their full retirement age were unable to maintain spending.
Ortiz broke the reasoning behind the difference in spending levels into two groups. For the first group, who retire in primary retirement years, retirees are more likely to spend more on travel and gifts, he said. The other group, he said, is made of people who are unexpectantly forced into retirement due to significant issues such as health problems.
“Many people describe the first years as ‘go-go’ years. They do the kinds of activities that require money,” he said. “Others who retire unexpectantly do so usually because of a health problem. Both the expenditures leading to and a few years after [retirement] are somewhat on the higher end.”
« Clarification of the Legislative Changes Made for RMDs