How will your spending change during retirement?

How will your spending change during retirement?

Michael Ainsworth

Private Client Adviser

A new report by the Institute of Fiscal Studies has found that current and future retirees should not plan on the basis that their overall spending will fall sharply during retirement, but will remain constant in real terms accounting for inflation.
Fuelled by concerns about retirees’ increased withdrawals from pension pots since ‘Pension Freedoms’ in 2015, the Institute of Fiscal Studies’ report ‘How does spending change through retirement?’ examines the spending patterns of current retirees in the UK using data from the Office for National Statistics’ Living Costs and Food Survey from 2006 to 2018. 

Key findings:
• On average, retirees’ total household spending remains relatively constant through retirement, increasing slightly up to age 80 and remaining flat or falling thereafter.

• The spending needs of future retirees could increase more strongly with age than is the case for current retirees.

• Retirees’ average household income also increases in real terms as people age. This is driven by private pension incomes increasing faster than the Consumer Prices Index (CPI) and increasing numbers of people receiving the State Pension and disability benefits.

• The pattern of spending changes, but not the overall value – spending on food inside the home and motoring falls steadily, holiday spending increases up to age 80, as does household services (including home help and domestic cleaning) in later years.

• Households with above-average incomes for their age and birth cohort have an increasing profile of spending in their 60s and 70s, with spending falling slightly for those in their 80s. Those with lower incomes have a slightly declining spending profile in their 60s but it remains flat at older ages.

• Households need to consider how changes in circumstances, in particular the death of a partner, will affect income and spending in order to ensure that resources are available to fund increases in per-person spending.

Heidi Karjalainen, research economist at the Institute of Fiscal Studies and author of the report concludes: “As retirement incomes are increasingly funded by defined contributions pots, which can be accessed flexibly, more and more retirees face complex and consequential decisions about how quickly to draw down their pension wealth.”

How does this affect your retirement income planning?
Based on the survey findings, current and future retirees should plan for having constant income needs during their retirement, rather than plan on the basis that their overall spending will fall during retirement. Making significant drawdown withdrawals early on in retirement with the intention of reducing spending needs later on, potentially carries a significant risk of an income shortfall at older ages. This makes the need for ongoing financial planning extremely important.

Where our advice services can help
Our experience of supporting clients over the generations is that everyone’s circumstances are different. However with regular financial reviews as you approach and during your retirement, we can help you and your family to manage your retirement income so that your pension savings can meet your needs throughout retirement.

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