Are early retirees overspending in retirement?

A growing number of retirees are overspending early in retirement instead of gradually reducing the amount of money going out. As a result, nearly half of people who retired between 1992 and 2014 lack the resources to sustain their level of spending.

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. This is what they found:

Nearly half of all retirees did not have the ability to maintain the same spending level for five years after retiring Just more than half of people who retired between 1992 and 2014 had income, savings or non-housing assets to maintain the same spending level for five consecutive years after retiring.

Analysis shows that of this 51 percent, 27 percent of retirees had the ability to maintain the same spending level with income from pensions, Social Security, annuities 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 or other non-housing assets, such as vehicles or businesses.

Two-thirds of younger retirees did not have the ability to maintain the same spending level for five years after retiring. The ability to maintain the same spending level varies significantly by sex, race, marital status, health status, educational attainment and generation.

More specifically, the ability to maintain the same spending level was higher among retired men than women, whites than non-whites, married than non-married and those with a college degree than without a degree.

Furthermore, a greater percentage of retirees born before 1946 than retirees born between 1946 and 1964 had the ability to maintain the same spending level for five years after retiring.

Retirees who were unable to maintain the same spending level after retiring reported large reductions in spending as they aged. 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 in categories such as transportation, travel, clothing and entertainment decline as they age.

The study found that the spending decline also is associated with the inability to pay for the expenses. Retirees who were unable to maintain the same spending level for five years reduced their expenses by 28 percent from the first year to the sixth year in retirement. By comparison, retirees who were able to maintain the same spending level for five years reduced their expenses by 19 percent from the first year in retirement to the sixth year.

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.

Researchers also examined the relationship between retirees’ ability to maintain the same spending level for five years after retiring and certain financial decisions that retirees made in the years leading to their retirement:

• A larger percentage of retired homeowners than renters had the ability to maintain the same spending level (59 percent vs. 30 percent).
• Fifty-five percent of retirees without non-mortgage debt had income, savings or non-housing assets to maintain the same spending level for five years after retiring.
• In general, retirees with pension income had greater ability to maintain the same spending level than retirees without pension income (73 percent vs. 39 percent).
• Among retirees with a pension, those who chose a pension cash-out were less able to maintain the same spending level for five years after retiring than those who chose to receive their pension as a monthly payment (73 percent vs. 56 percent).

“The study findings indicate that certain financial decisions may enhance or diminish retirees’ ability to maintain the same level of spending; for example, homeowners entering retirement without mortgage debt,” the study concluded.

“For those with a pension, choosing a monthly annuity rather than in a lump-sum payout, is positively associated with retirees’ ability to maintain the same spending level for five years. In addition, the study found that claiming Social Security benefits at the full retirement age or after, as opposed to choosing a reduced benefit by claiming early, is positively associated with retirees’ ability to maintain the same spending level for five years.”