The first years in retirement are, on average, retirees’ most expensive years. Furthermore, a growing number of retirees are not experiencing the expected
gradual reduction in spending after they retire. The Consumer Financial Protection Bureau commissioned a study
to identify ways to increase retirement preparedness and protect retirees from overspending their savings in early retirement. The study examined the financial
resources and expenses of people who retired between 1992 and 2014 to assess whether they were able to maintain the same spending level on key categories for five
consecutive years after retiring.
The Bureau found that 51 percent of people who retired between 1992 and 2014 had income, savings, and/or non-housing assets to maintain the same spending level
for five consecutive years after retiring. The analysis shows that of the 51 percent, 27 percent of retirees had the ability to maintain the same spending level
with income from pensions, Social Security, annuities and/or other sources of regular income. The other 24 percent of retirees had the ability to maintain the
same spending level after adding the value of retirement accounts, savings, mutual funds and/or other non-housing assets, such as vehicles or businesses.
In general, retirees’ spending declines as they age. A common explanation for this pattern is that retirees spend less because their spending preferences
and needs on categories such as transportation, travel, clothing, and entertainment decline as they age. The Bureau’s analysis found that the spending decline
is associated with the inability to pay for the expenses. The study found that retirees who were unable to maintain the same spending level for five years reduced
their expenses 28 percent from the first year in retirement to the sixth year in retirement. In comparison, the study found that retirees who were able to maintain
the same spending level for five years reduced their expenses 19 percent from the first year in retirement to the sixth year in retirement. Furthermore, the study
found that severe spending reductions (50 percent or more) were more likely among retirees who were unable to maintain the same spending level than those who
were able to do so.
The Bureau examined whether the age at which retirees claimed their Social Security benefits was associated with their ability to maintain the same spending
level for five years after retiring. The analysis shows that 65 percent of retirees who claimed a full or increased benefit by claiming at or after their designated
full retirement age (FRA) had the ability to maintain the same spending level for five years after retiring. In comparison, 55 percent of retirees who claimed a
reduced Social Security benefit by claiming before their full retirement age (FRA) had the ability to maintain the same spending level for five years after
retiring.