An old retirement planning rule of thumb states that your post-retirement expenses should equal 80% of your pre-retirement expenses. But is that true? Each year, the Bureau of Labor Statistics studies how much Americans actually spend in retirement; the data might surprise you. Does the 80% replacement rule hold? How much do Americans really spend in retirement? Let’s find out.
The Bureau of Labor Statistics Consumer Expenditure Survey divides consumers into age-based groups. For the purposes of examining retiree spending, we’ll look at the eldest three groups:
- People between ages 55 and 64,
- People between ages 65 and 74, and finally,
- People aged 75 or older.
Making these comparisons can be challenging since many people choose to retire somewhere in the middle of the first age group we’re examining. Some of this cohort’s data may include both retirees and those still choosing to work for the entire period, so keep this in mind as we move forward.
Average Retirement Spending
According to the 2020 survey, the people in these age groups annually spent on average:
- Age 55 – 64: $64,937 ($5,411 per month)
- Age 65 – 74: $52,356 ($4,363 per month)
- Age 75 & up: $40,839 ($3,403 per month)
Of course, these are averages from a limited sample set. Your spending in retirement may vary quite a bit. However, as we can see, spending tends to drop significantly over time.
Does the 80% Rule Hold?
If spending declines in retirement, how does it stack up against pre-retirement expenditures? In other words, does the 80% replacement rule hold?
Given that many in the 55 to 64 age group are still working, it’s hard to draw conclusions from this group. However, we can use the age 45 to 54 group as our benchmark. According to the survey, this cohort spends $74,783 per year on average. Since these are the “peak spending years” in the study, we can use them as our benchmark for replacement ratios.
- Age 55 – 64: 87% of pre-retirement spending
- Age 65 – 74: 70% of pre-retirement spending
- Age 75 & up: 55% of pre-retirement spending
Again, it’s difficult to draw any conclusions from the age 55 to 64 group, although their expenses do drop. However, it’s the eldest two age groups where we find some significant reductions when it comes to spending in retirement. Based upon this data set, the 80% rule might need to be revised downward to 70%.
However, we should note that there is some variability in the numbers. Also, there’s no way to easily parse out whether these expense reductions were consistent across all ranges of net worth within each age cohort.
Surprising Numbers in the Data
While a reduction in spending over time may not come as a complete shock, there were some surprises in the data. First and most importantly, were the numbers on healthcare spending. According to the survey, average healthcare expenses stayed relatively constant over age 65.
The age 65 to 74 group spent $6,695 per year on average, while the age 75 and above group spent $6,627. I find this extremely encouraging, given the continuously rising costs of healthcare. On average, seniors aren’t spending more on healthcare past 65.
The second surprise in the BLS survey data was the cost of housing for retirees. While housing costs are the biggest line item in the average American’s budget, they drop later in life. It’s not clear why this is the case, although we can certainly speculate. It’s also encouraging that, after age 75, four out of five own their own home, with 77% of that number having completely paid off their house.
Finally, one of the most surprising, and heartening, trends in the data shows that Americans become more generous as they age. The amount of money given to family, friends, and important causes increases both in the amount and the percentage of their budget. In the 75 and over age group, giving comprises around 8% of their total expenses, up from 6% in their prior decade.
The data in the most recent Consumer Expenditure study clearly indicates that retirees spend less in retirement than they did while they were working. The 80% rule is alive and well. Of course, this is just one study and no one person is average. Since retirement spending is the main driver in the success of your financial plan, it’s important to have a plan before you leave your job for the last time.
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