NCPA - National Center for Policy Analysis


August 24, 2005

Conventional financial planning assumes that our spending will rise forever, but research shows that as retirement approaches, overall spending actually declines, says Scott Burns, economic columnist for the Dallas Morning News.

If spending declines in retirement, people won't need to save and invest as much and thus will be better able to adequately fund their retirement, but others still contend that any decline in consumption expenses will be overwhelmed by increases in medical expenses, says Burns.

According to a 2002 Consumer Expenditure Survey of different age groups (45- to 54-year old, 55- to 64-year olds and 75 years old and over):

  • The total average annual expenditures for 45- to 54-year olds were $48,784; the same figures showed that every category except health care declined in each subsequent 10-year period ending at $23,759 for those 75 and older.
  • Overall, that's a drop of 49 percent in 30 years and compound annual decline of 2.37 percent a year.
  • Annual consumption declined from $44,330 for 55- to 64-year olds, in the age bracket when people begin to retire, to $23,759 annually for 75 year olds; that's a decrease of 46 percent in 20 years and an annualized rate of 3.07 percent.
  • That's enough to offset the overall rate of inflation and leaving real income flat.

Furthermore, individual categories show dramatic declines in consumption from ages 55 to 75:

  • Spending on personal insurance and pensions falls 86 percent.
  • Transportation and housing falls 62 percent and 40 percent, respectively.
  • Apparel and services falls 62 percent.
  • Food, alcohol and entertainment fall 42 percent and miscellaneous items, 27 percent.

Health care is the only category to experience an increase, but it is a slight one of 19 percent; if you stay healthy, you won't spend much, but that's a big if, says Burns.

Source: Scott Burns, "Senior spending tapers off," Dallas Morning News, August 14, 2005.


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