Retirees with higher-than-average incomes tend to increase spending levels during their 60s and 70s, although this dips later in retirement, according to new analysis of pensioner spending patterns.
The detailed research by the Institute of Fiscal Studies found that on average total household spending per person remains relatively constant in real terms throughout retirement, increasingly slightly at ages up to 80, then remaining flat or dipping slightly afterwards.
However, it points out that there are difference in spending patterns across different households. Those with above-average income for their age cohort have an increased profile of spending in their 60s and 70s, with spending falling slightly for those in their 80s.
Those with below median incomes have a slightly declining age profile of spending in their 60s and spending remains flat at older ages.
The report also found that with relatively constant spending patterns, increasingly income means that more people save, and save at higher rates as they age. For example for those born in 1939-43, almost six out of 10 saved at age 67, but this rose to almost seven in 10 by the age of 75. Over the same ages the share of income saved by that group rose from 2 per cent to 15 per cent.
The IFS said these higher income were the result of higher state pension and the receipt of survivors’ benefits.
The report found that spending increases, particularly in the higher income groups, were driven largely by increasing spending on holidays, although this declined only people were in their 80s.
However the per-person spending on food and transportation falls throughout retirement.
This research uses data from the Living Costs and Food Survey, from 2006 to 2018. The IFS says this analysis is important, particularly in light of the new pension freedoms rules and the adequacy of retirement savings for current workers.
It says its findings suggest that, on average, people should strive for a total income profile that is roughly constant in real terms throughout retirement, rather than assuming that spending needs will reduce sharply in their later years.
It adds that households must also consider how changes in circumstances, such as the loss of a partner, may affect income and spending when planning their future finances.
Canada Life technical director Andrew Tully says: “Managing your income in retirement can be difficult to plan for however this research does shed some much needed light on spending patterns in the early years of retirement and as people continue to age.
“People with defined contribution pots face complex decisions to try and sustain income throughout retirement. This research shows we should not assume that their spending will decrease in later life
“It is interesting that annual spending on holidays, for example, appears to go up in the early years of retirement, alongside a drop in spending on groceries and motoring as people get older.
“However it is concerning to see that spending on bills appears to grow after the age of 75, possibly reflecting the death of a spouse and being no longer able to share the burden of household costs. With the cost of living crisis at the front of everyone’s mind, those on fixed incomes such as pensioners will have fewer levers to pull to get through the challenges we face. Many of those who need to are already tightening their belts, reducing their energy consumption, going out and eating out less often or changing shopping habits, and this will only get worse as inflation grows through the year.”
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