How Spending Priorities Change as We Age

Household spending declines at a steady pace among retirees, according to a new study from the Employee Benefit Research Institute (EBRI). Beginning with spending levels at age 65, the study said, "household expenditure falls by 19 percent by age 75, 34 percent by age 85, and 52 percent by age 95."

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Actual spending patterns of older Americans differ substantially from the advice often given to retirees that they should expect to spend 75 percent to 80 percent of their preretirement spending after they've stopped working.

"There is not any universal number like that," according to the study's author, EBRI researcher Sudipto Banerjee. "For different income groups and different demographic groups," he says, "people are doing very different things in terms of balancing their spending with their incomes."

On average, the study found, retired households spent only about 80 percent as much as working households. However, such households earn, on average, only about 57 percent as much as working households. In part, that's because working households have to set aside a lot of their earnings for Social Security and other retirement needs. But it also indicates that many retired households are literally spending every dollar that comes in the door.

Declining spending, of course, can be a response to declining needs, declining income, or a combination of both. And there is evidence of all three trends in the study. Generally, people in the upper half of retirement income levels consistently spend less than they make, while lower-income groups regularly spend more than they make.

"Singles, blacks, and high school dropouts do not have a sound financial standing in retirement," the study said. "Their expenditures exceed their income and they hold very little financial wealth ... People in the bottom income quartile are struggling, both in their pre- and post-retirement years."

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Across spending categories, Banerjee said, "medical expenses are the only category that goes up as you age." Medical expenses were $2,844 a year, or 9 percent of the median income of households with people ages 50 to 64. They rose in both dollar and percentage terms for households with people ages 65-74 ($3,504, or 12 percent) and 75 to 84 ($3,692, or 15 percent). Medical expenses declined to $3,006 for households with people older than 85, but still accounted for 18 percent of median household spending. Meanwhile, as households aged, spending on transportation and entertainment consistently fell in both dollar amounts and as percentages of household income.

Healthcare expenses are widely recognized as a potential wildcard in retirement finances. The possibility of a serious health event and big medical bills is something that lower-income families cannot plan for. Among people with more resources, however, there is evidence that they protect themselves from a financial catastrophe by buying long-term care insurance and health insurance.

Having this insurance apparently frees such households in part from having to set aside money for such expenses. As a result, they spend more money than other retired households, even allowing for possible income differences among households. "LTC insurance and private health insurance continue to be important determinants of spending even after controlling for income and other factors," the study said.

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Here are details about median household spending, by spending category, for four different age groups of older Americans:

Twitter: @PhilMoeller