More studies: Spending declines with age

[walkinwood]

Dirk Cotton has an excellent write up on two studies that show that spending decreases as we age. His analysis of the papers makes for good reading: (He's going to follow it with another post, so look for it)

The Retirement Café: Spending Typically Declines as We Age

Here are my takeaways:
- The amount of decrease depends on the actual spending. ie. The percentage decrease was more for higher annual budgets (over savers) than for lower ones (under savers).

- The decrease in the amount saved at retirement (across all annual budgets) is about 12.5% if you take the more moderate of the two studies. For people contemplating ER, I think that's not a big deal and it may make sense to just wait till you have enough for a constant spend through retirement. (that's my opinion, not Dirk's).

- Medical expenses late in life seems to slow the rate of decrease in spending, but doesn't seem to make it rise even to the level that it was at retirement.

A request: These are obviously statistical conclusions and don't apply to Aunt Harriet, so let's leave her out of the discussion.

 

[Options]

Thanks for this. I referred to Cotten's prior posts on retirement spending in another thread but was too lazy to search for it. Too important points:

Medical expenses late in life can increase expenditures significantly, but both studies appear to show that even when medical expenses do increase expenditures at older ages, they are lower than early retirement spending in real dollars.

and

Why is this important? It should be obvious that when we try to estimate an amount of our savings that we can safely spend in the current year we must make some assumption about our future spending patterns. Spending strategies assume that our expenditures in real dollars will remain flat throughout retirement. If our actual spending will increase over time, we can safely spend less in the current year than these strategies predict, and the reverse is true if our expenditures will actually decline after we retire.

 

[mathjak107]

increasing healthcare costs are killing the old smile shaped spending pattern we were suspected of having.

at 3x the rate of inflation any savings by spending falling off as we age now seems to be eaten up by healthcare.

depending on location results can be very variable depending on age.

here in ny we are a community based state so we are all priced on medigap the same regardless of age or health. our plans can run 2x what georgia does but we don't go up much as we age . but if you are an aged based state you start out lower and increase with age. that typically destroys that smile shape .

 

[walkinwood]

The followup post from Dirk Cotton:

The Retirement Café: Retirement Spending Assumptions and Net Worth

Interestingly, he points out that spending increased with age for the "high net worth / Low spending" group which describes a lot of us here.

 

[Cut-Throat]

increasing healthcare costs are killing the old smile shaped spending pattern we were suspected of having.

at 3x the rate of inflation any savings by spending falling off as we age now seems to be eaten up by healthcare.

depending on location results can be very variable depending on age.

here in ny we are a community based state so we are all priced on medigap the same regardless of age or health. our plans can run 2x what georgia does but we don't go up much as we age . but if you are an aged based state you start out lower and increase with age. that typically destroys that smile shape .

I keep hearing this, but is it reality? I have an old friend (86) that has had more trips to the hospital, surgeries, re-rehabilitation due to falls, medications etc. etc. over the last 20 years that I'm surprised that he's still alive. He always tells us that Medicare and his $200 Month supplemental policy covers it all. He has little discretionary income, so, it's true. He may be spending a lot of money, but, it's not his money! He is always surprised that Medicare covers his medical bills almost 100%. He very rarely even has to use his supplimental insurance (Which is probably why they're so popular with insurance companies.)

 

[athena53]

The followup post from Dirk Cotton:

The Retirement Café: Retirement Spending Assumptions and Net Worth

Interestingly, he points out that spending increased with age for the "high net worth / Low spending" group which describes a lot of us here.

My guess would be that the others have run through their savings, or are trying to make them last. The increase with age for the wealthier group could be due to hiring out more services as you get older. We're already having a discussion elsewhere on lawn mowing! DH and I don't do very high ladders (he doesn't do ladders at all), and although we both just did a crapton of work to get our house ready for the realtor and her photographer (they arrive in an hour), we're aching in a lot of places. We hired out carpet cleaning and a general house clean but I washed windows and we both hauled out a ton of stuff to be donated/ given away on Craigslist/ trashed or stored for our next house. If you're too old to DIY and can afford it, you pay someone else to do it.

 

[Andre1969]

I keep hearing this, but is it reality? I have an old friend (86) that has had more trips to the hospital, surgeries, re-rehabilitation due to falls, medications etc. etc. over the last 20 years that I'm surprised that he's still alive. He always tells us that Medicare and his $200 Month supplemental policy covers it all. He has little discretionary income, so, it's true. He may be spending a lot of money, but, it's not his money! He is always surprised that Medicare covers his medical bills almost 100%. He very rarely even has to use his supplimental insurance (Which is probably why they're so popular with insurance companies.)

My grandmother is 91, and didn't start running up the big bills until late last year. She was a federal gov't employee, so I know nothing of her health insurance except that it's Blue Cross/Blue Shield. Her doctors visits were always free, as I recall, and her medications were usually just $30 for the first prescription and $10 for refills.

She had to go into the emergency room/rehabilitation a couple times that I can remember. Once in 1995 when she got depressed, stopped eating, and got dehydrated. Twice in 2010 when she got a blood clot, then they put her on blood thinners and she went anemic. Between SS and BC/BS they cover something like the first 30 days in those rehabilitation places, but she was out before that ran out all three times.

She went in again, however, in August of last year, and this time, I think it's the beginning of the end. She got well enough to be put in one of those assisted living facilities that's basically a converted house that has someone on duty. They'll cook for you, help you bathe, make sure you take your meds, etc, but not really equipped to do heavy-duty doctoring. I think that ran about $3500 per month. Unfortunately, she got worse again, and had to go back in the emergency room. Now she's in a rehabilitation/nursing home/whatever you call it on the hospital grounds, and now that the Medicare and BC/BS ran out, it's running around $10,000 per month.

My other two grandparents who died, went free-and-clear, without any big bills as far as I can remember. But that was back in 1990 and 1994, respectively, so I guess medical costs hadn't soared as badly yet.

 

[Mulligan]

My guess would be that the others have run through their savings, or are trying to make them last. The increase with age for the wealthier group could be due to hiring out more services as you get older. We're already having a discussion elsewhere on lawn mowing! DH and I don't do very high ladders (he doesn't do ladders at all), and although we both just did a crapton of work to get our house ready for the realtor and her photographer (they arrive in an hour), we're aching in a lot of places. We hired out carpet cleaning and a general house clean but I washed windows and we both hauled out a ton of stuff to be donated/ given away on Craigslist/ trashed or stored for our next house. If you're too old to DIY and can afford it, you pay someone else to do it.

Since retiring, staying off ladders higher than can reach my interior light bulbs is one of the cheapest insurance policies I have "purchased". So many other potential things can get me, no reason to add a needless one. The energy and strength are still there....the flexibility and agility, however, have been replaced with stiffness.


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[Cut-Throat]

My grandmother is 91, and didn't start running up the big bills until late last year. She was a federal gov't employee, so I know nothing of her health insurance except that it's Blue Cross/Blue Shield. Her doctors visits were always free, as I recall, and her medications were usually just $30 for the first prescription and $10 for refills.

She had to go into the emergency room/rehabilitation a couple times that I can remember. Once in 1995 when she got depressed, stopped eating, and got dehydrated. Twice in 2010 when she got a blood clot, then they put her on blood thinners and she went anemic. Between SS and BC/BS they cover something like the first 30 days in those rehabilitation places, but she was out before that ran out all three times.

She went in again, however, in August of last year, and this time, I think it's the beginning of the end. She got well enough to be put in one of those assisted living facilities that's basically a converted house that has someone on duty. They'll cook for you, help you bathe, make sure you take your meds, etc, but not really equipped to do heavy-duty doctoring. I think that ran about $3500 per month. Unfortunately, she got worse again, and had to go back in the emergency room. Now she's in a rehabilitation/nursing home/whatever you call it on the hospital grounds, and now that the Medicare and BC/BS ran out, it's running around $10,000 per month.

My other two grandparents who died, went free-and-clear, without any big bills as far as I can remember. But that was back in 1990 and 1994, respectively, so I guess medical costs hadn't soared as badly yet.

Your story is "long term care" costs rather than Medical Costs per se. There are also insurance policies for Long Term Care Costs. A different topic for sure. I do understand that Long Term Care costs can get large.

 

[Big_Hitter]

Thanks for posting this!


"A 30-year retirement with level real spending of $100,000 a year would cost about $2.4M if we discount future expenses at 2%. Assuming Blanchett's findings for a retiree with a spending target of $100,000 a year, the same retirement would cost about $2.1M. Using the Banerjee 2012 finding that expenditures tend to decline about 2% annually, that retirement would cost only about $1.8M."


that's material

 

[MileKing]

I'm curious as to what portion of the spending decline is attributable to income taxes. For the vast majority of people, taxable income (and thus income tax) falls as people are relying on social security and/or a pension, plus withdrawals from taxable accounts (401k, IRA, etc.). Even collectively, these items are usually not at the same level as a person was earning while working so it would seem there is a built in bias towards a lower spending level.

I'm about 4 years away from retirement (at 55) if things go well, and see no scenario where our spending will decrease. In fact, spending (excluding taxes) will increase as we will no longer have employer subsidized heathcare and will be reliant on the ACA.

 

[Big_Hitter]

I'm about 4 years away from retirement (at 55) if things go well, and see no scenario where our spending will decrease.

not to be a Debbie downer but premature death would be one such scenario

 

[Cut-Throat]

I'm about 4 years away from retirement (at 55) if things go well, and see no scenario where our spending will decrease. In fact, spending (excluding taxes) will increase as we will no longer have employer subsidized heathcare and will be reliant on the ACA.

Depends on what you have in your Retirement Budget. If it is mostly non discretionary items and not Travel, Golf Memberships and other items which most people cut back on, then your spending may not decrease.

BTW - You won't be 'reliant' on the ACA when you're over 65, you'll be on Medicare. ACA stops at age 64

 

[daylatedollarshort]

Personally if I felt I needed a higher spending level now I would work part-time more, not cut the budget of my elderly future self.

 

[thefinancebuff]

My guess would be that the others have run through their savings, or are trying to make them last.

That's the big unanswered question. If the spending decline is involuntary, counting on declining spending doesn't make a good plan.

 

[Amethyst]

From the ads we receive (walk-in bathtubs, wrinkle creams, giant underwear, Ambulatory Adult communities, and in poor Mr. A's case, burial services), it's clear that once you turn 50 or 55, companies don't expect you to buy anything interesting or fun. Presumably they've done their market research and are on to something, as regards the general population.

Amethyst

 

[audreyh1]

This is interesting. But my takeaway from this is that I won't count on our spending declining, because we are in the underspending camp.

Low Spending, High Net Worth households appear to have the highest probability of increased expenditures throughout retirement, but they can afford it. They are underspending. A likely cause for such an increase in expenditures, in fact, is recognition over time that they have the resources to spend more.

This graph also demonstrates the key point that increasing expenditures don't necessarily mean that retirement is getting more expensive and decreasing expenditures don't mean it is getting less expensive. They mean that retirees are spending more or less. Expenditures, the subject of this analysis, are not the same as expenses. Sometimes expenditures change because retirees have to spend less and sometimes it is because they can spend more.

I envision paying for a lot more assistance as I get older. And if we still travel - paying for the conveniences that make traveling easier for an older person.

I think I believe some of the older folks reduction in spending is due to no other choice. I.e. they don't have the remaining funds to spend more.

 

[audreyh1]

From the ads we receive (walk-in bathtubs, wrinkle creams, giant underwear, Ambulatory Adult communities, and in poor Mr. A's case, burial services), it's clear that once you turn 50 or 55, companies don't expect you to buy anything interesting or fun. Presumably they've done their market research and are on to something, as regards the general population.

Amethyst

That's especially funny because supposedly those folks 50 to 55 are in their peak earning years and it's the 55+ that have most of the net worth!

 

[rbmrtn]

I keep hearing this, but is it reality? I have an old friend (86) that has had more trips to the hospital, surgeries, re-rehabilitation due to falls, medications etc. etc. over the last 20 years that I'm surprised that he's still alive. He always tells us that Medicare and his $200 Month supplemental policy covers it all. He has little discretionary income, so, it's true. He may be spending a lot of money, but, it's not his money! He is always surprised that Medicare covers his medical bills almost 100%. He very rarely even has to use his supplimental insurance (Which is probably why they're so popular with insurance companies.)

+1, This has been my experience with elderly relatives. In particular my mother is 93 and runs up some large bills with trips to the ER, hospital stays but pays very little out of pocket compared to the bill. Her secondary picks up most of what Medicare has left over which typically is not much.

Yes, the assisted living is another issue ....

 

[Cut-Throat]

This is interesting. But my takeaway from this is that I won't count on our spending declining, because we are in the underspending camp.

I envision paying for a lot more assistance as I get older. And if we still travel - paying for the conveniences that make traveling easier for an older person.

I think I believe some of the older folks reduction in spending is due to no other choice. I.e. they don't have the remaining funds to spend more.

How many friends do have that are in their mid 80s? - I eat breakfast with a few of them a few times a week. Most of these guys have more money than they can possibly spend, but are physically unable to do the things they used to. They keep reminding me to 'Do it while you can'.

You may envision paying for more assistance as you get older, but it probably won't be for enjoyable things. A lot of my friends used to golf, but cannot anymore. Sure you could pay someone else to hit the ball, while you sat in the cart, but.....you get the picture.

Also, a lot of these people do not want help navigating through airports and being helped on the plane, with their luggage etc. etc. They are very independent minded and do not enjoy being helped. They have a hard enough time getting to breakfast and deep down inside, they know they should be turning over the car keys.... And then they become further dependent on waiting for taxis or friends or ?

I suggest that you talk to a lot of folks in their 80s and get their perspective. We all have a far rosier picture of our later years than reality. And the message that I get from all of these Octogenarians is to Live life now to the fullest. You know the saying. The Go Go 60s, The Go Slow 70s, The No Go 80s and the No Show 90s.....

 

[MichaelB]

I think I believe some of the older folks reduction in spending is due to no other choice. I.e. they don't have the remaining funds to spend more.

This would appear to be strongly supported by the Consumer Expenditure Survey. While spending declines across the age groups, income declines more rapidly beginning age 65, and at age 74+ spending exceeds income. While correlation is not causation, one cannot spend what one does not have.

+1, This has been my experience with elderly relatives. In particular my mother is 93 and runs up some large bills with trips to the ER, hospital stays but pays very little out of pocket compared to the bill. Her secondary picks up most of what Medicare has left over which typically is not much.

Yes, the assisted living is another issue ....

The Morningstar paper (referenced in the OP link) said "medical as a % of total spending" went up for everyone and also actual healthcare spending increased for the upper income segment.

I think non-covered Medicare expenses, especially home aide care and assisted living, represent the lions share of this increased expense. They are so expensive, relative to other expense categories, it's easy to see them push up the averages and affect overall spending in this way.

 

[photoguy]

I'm skeptical that the population in the studies Cotton uses as a reference are representative of early-retirees (e.g., the high-spend category is defined at 30k and high net worth is 400k including present value of SS/pensions) BUT lets say you believe spending will decrease as you age (once you get to age 60-65 as per the study). What do you plan to do right now? perhaps increase your withdrawals?

For me, the age where spending goes down is far enough away that the uncertainty from portfolio returns totally dwarfs everything else.

 

[Amethyst]

I know! But apparently people must not be spending those $$ on the things advertisers want us to buy.

OTOH we find ourselves buying more and more services, which involve much more $$ than "Things" do, but aren't advertised as heavily.

Plus, you can't just "buy a contractor" the way you'd buy a name-brand gas grill, and know what you're getting. Much more research and uncertainty is involved, and this is off-putting. We have found ourselves deferring maintenance, because finding someone reliable to do things you can't do for yourself can be such a hassle.

Amethyst

That's especially funny because supposedly those folks 50 to 55 are in their peak earning years and it's the 55+ that have most of the net worth!

 

[Mulligan]

I know! But apparently people must not be spending those $$ on the things advertisers want us to buy.

OTOH we find ourselves buying more and more services, which involve much more $$ than "Things" do, but aren't advertised as heavily.

Plus, you can't just "buy a contractor" the way you'd buy a name-brand gas grill, and know what you're getting. Much more research and uncertainty is involved, and this is off-putting. We have found ourselves deferring maintenance, because finding someone reliable to do things you can't do for yourself can be such a hassle.

Amethyst

I think that is really the crux of the matter. There is spending going on but older people have the reputation (and I am getting there) for being set in their ways, and less influenced by marketing pitches.... Depends, door opening bath tubs, and HurryCanes not withstanding!


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[Mulligan]

How many friends do have that are in their mid 80s? - I eat breakfast with a few of them a few times a week. Most of these guys have more money than they can possibly spend, but are physically unable to do the things they used to. They keep reminding me to 'Do it while you can'.

You may envision paying for more assistance as you get older, but it probably won't be for enjoyable things. A lot of my friends used to golf, but cannot anymore. Sure you could pay someone else to hit the ball, while you sat in the cart, but.....you get the picture.

Also, a lot of these people do not want help navigating through airports and being helped on the plane, with their luggage etc. etc. They are very independent minded and do not enjoy being helped. They have a hard enough time getting to breakfast and deep down inside, they know they should be turning over the car keys.... And then they become further dependent on waiting for taxis or friends or ?

I suggest that you talk to a lot of folks in their 80s and get their perspective. We all have a far rosier picture of our later years than reality. And the message that I get from all of these Octogenarians is to Live life now to the fullest. You know the saying. The Go Go 60s, The Go Slow 70s, The No Go 80s and the No Show 90s.....

Cut-Throat, I am 20-30 years from that point you described above....But you have described my future perfectly.


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