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Benchmarks for Setting Your Retirement Target

Past performance may not always predict future results. But knowing how people like you have adjusted their finances to meet the needs of retirement can help you set your own expectations. To help see how people are really adjusting their spending after they retire, analysts at the Employee Benefit Research Institute used data from the Census to follow a large selection of people through the years before and after their retirements.¹ Here's what they found:

• People tend to spend less as they get older. Half of all retirees cut their spending by at least 5.5% in the first year of retirement, and by at least 12.5% by the fourth year after retirement.
• Retirees tend to taper off their spending at different rates. While the median reduction in spending was 10.3% during the first two years of retirement, 40% of the households in the sample cut their spending by 20% or more. Also, retirees with greater incomes tended to slow their spending more gradually, while those with lower incomes tended to reduce their spending most heavily in the first year or two after retirement.
• Retirees spend their money differently than workers. People spend less on durable goods such as major household appliances after they retire. Commuting expenses all but disappear from many peoples' budgets. Health care costs were not specifically analyzed in this study, but other research shows that total out-of-pocket spending on health care and related items tends to increase as people grow older.
• Housing is a significant factor in post-retirement spending. Retirees were, on average, still paying off principal on home mortgages, even six years after retiring. However, the median mortgage principal payment for the post-retirement study group was not statistically significant, which suggests that the mortgage burden fell most heavily on a few retirees. Housing expenses overall declined at rates commensurate with overall spending drops.
• Not all retirees cut back -- a significant number spend more in retirement. While the median level of spending among all retirees declined, nearly half of retirees increased spending in the first two years of their retirements. Many of these people reduced their spending later on, suggesting that some people yielded to an urge to splurge. It should also be noted that income level had little to do with predicting who might increase their spending at the start of retirement. Increases were observed among low-income retirees at approximately the same rate as among higher-income retirees.

As you develop your estimates for total retirement spending, keep in mind that many tax burdens decline for retirees. When you stop working, core FICA tax obligations could disappear entirely and depending on your sources of retirement income, your net income tax rate could also decline significantly.