The average spending of recent retirees
with higher-than-average incomes increased through their
60s and 70s. Incomes increased even faster. Spending
increases were driven in large part by increasing spending on
holidays, and declined only once people were into their 80s.
Increased incomes were driven by higher state pensions and
receipt of survivors’ benefits.
One curious consequence of this, and despite spending rising
until about age 80, is that current retirees save more of
their income as they get older.
There are important implications for future retirees. The
desire and need to spend do not appear to fall as you
age. In the new, complex world of low interest rates,
high inflation and managing drawdown, they shouldn’t bank on
being happy with spending falling as they get older.
- Among those born between 1939 and 1943, households with
above-average incomes increased their annual spending (per
person) between the ages of 67 and 75 by 7%, or £1,200, after
accounting for inflation.
- A major driver of this increase was a rise in spending on
holidays, with annual average spending per person on holidays
rising by £430 between the same ages.
These are among the key findings of new IFS research, funded by
the IFS Retirement Saving Consortium and the Economic and Social
Research Council, published today, which examines how the
spending of recent retirees changed as they aged, over the period
from 2006 to 2018.
While spending clearly rose for higher-income people,
those with lower incomes saw their spending remain broadly flat
as they moved through retirement.
There were also important changes in the composition of
spending as people aged:
- While spending on food enjoyed at home and on motoring fell
steadily with age, annual spending on holidays increased by £430
between ages 67 and 75.
- Spending on household services (including spending on
domestic cleaning and home help) and household bills (i.e.
utilities and council tax) increased from the mid 70s onwards.
- Spending on bills grew by £350 per person per year between
ages 75 and 85. This reflects the fact that shared expenditures
like these tend not fall when a partner dies and so roughly
double on a per-person basis.
Average household income per person for retirees aged 62
and older increased strongly with age.
-
For those born in 1939–43, average annual household
income per person was £13,000 at age 67 and £16,000 at age 75,
an increase of 24% (after adjusting for inflation).
- Increases in income were driven by state pension incomes
increasing faster than prices and by increasing numbers of people
receiving the state pension, disability benefits and survivors’
benefits as they age.
- Incomes increasing faster than spending means that
rates of saving increased with age through
retirement.
Heidi Karjalainen, a Research Economist at IFS and an
author of the report, said:
‘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. If the spending
patterns of current retirees are a good guide to how people in
the future will want to spend, planning drawdowns on the basis of
reduced spending needs in later retirement may not be wise as it
may result in unexpected shortfalls in living standards at older
ages.
‘While average pension incomes have grown strongly with age in
recent years, leaving many retirees with more resources than they
chose to spend, high inflation is reducing retirees’ spending
power and – along with the more uncertain outlook – makes careful
financial planning all the more important.’
ENDS
Notes to Editor
- 'How does spending change through retirement?' is an
IFS report by Rowena Crawford, Heidi Karjalainen and David
Sturrock.
This research was funded by the IFS Retirement Saving
Consortium and by the Economic and Social Research Council
through a Secondary Data Analysis Initiative grant
(ES/W002671/1) and the ESRC Centre for the Microeconomic
Analysis of Public Policy (ES/T014334/1).
-
- The IFS Retirement Saving Consortium is comprised of Age UK,
Association of British Insurers, Association of Consulting
Actuaries, Canada Life, Interactive Investor, the Investment
Association, Money and Pensions Service, and Pensions and
Lifetime Savings Association.
