IFS: Retirement spending increases between ages 62 and 80

The institute’s ‘How does spending change at retirement’ study sheds light on spending patterns in the early years of retirement, and rebuts the idea that as people change their spending will naturally fall. 

It found that on average, retirees’ total household spending per person remains relatively constant in real terms through retirement, increasing slightly at ages up to around age 80 and remaining flat or falling thereafter. 

If people end up spending more than they expected as they age, there is a chance they could exhaust their pension pots too soon

Becky O'Connor, Interactive Investor

Spending increases for those aged 62 to 80

While total spending appears to decrease dramatically with age, when accounting for birth cohort differences by looking at changes within each generation the relationship between age and spending is flat, or in some cases even slightly increasing. 

The increasing spending trend is particularly prevalent among those aged 62 to 80 and for couples, according to the study.

The IFS found very clear differences in the levels of spending between five-year cohorts, and particularly between those born in 1934–38, 1939–43 and 1944–48, which it said shows the importance of accounting for generational differences when looking at age profiles of spending. 

Those born in 1939–43, spending at age 67 on average was £245 per person a week, rising to £263 a week at age 75 — which is just under 1 per cent a year or 7 per cent when adjusting for inflation.

Individuals born in 1924–28 spent £197 per week at age 82, falling 6 per cent in inflation-adjusted terms to £185 at age 88, or around 1 per cent each year. 

The IFS analysed spending patterns of current retirees by mainly using the UK’s Living Costs and Food Survey, from 2006 to 2018.

Spending on holidays rises then falls in mid-eighties

The study found while some costs fall during retirement, others increase because the composition of spending changes as people age. 

Per-person spending on food inside the home falls, which is in line with the fact that appetite tends to fall with age, perhaps due to reduced activity or illnesses. 

However, spending on food outside the home at first increases in retirement and only starts decreasing when individuals are in their eighties. Expenditure on motoring, alcohol and tobacco decreases during retirement.

Meanwhile, spending on holidays increases up to the early eighties and only starts falling from the mid-eighties, while motoring costs fall steeply from the late-seventies as people drive less as they age.

When comparing individuals aged 82 and born in 1924–28 with those aged 62 and born in 1944–48, the IFS found that 57 per cent of the older group spend something on motoring and 19 per cent spend something on holidays. 

Meanwhile, the younger group spend 83 per cent on motoring and 41 per cent on holidays. These two spending categories are relatively large parts of spending at the start of retirement, and show interesting age patterns, the IFS found.

The estimated increase in spending on holidays is substantial — a rise of £13.60 a week on average from age 65 to 80.

Later-born generations typically spend more at the start of retirement on leisure services and holidays. These account for 7 per cent of total spending for those aged 65 who were born in 1924–28, while it is 11 per cent for those born in 1944–48. 

The IFS said this could mean that “the spending of younger, and future, generations of retirees could grow more strongly with age than is the case for current retirees”.

Higher household bills in later years

Spending on household services and bills rises in later years, with the IFS estimating that weekly spending on household bills and costs increases by £6.70 a person between the ages of 75 and 85. 

Andrew Tully, technical director at Canada Life, said: “It is concerning to see that spending on bills appears to grow after the age of 75, possibly reflecting the death of a spouse and being no longer able to share the burden of household costs.”

Becky O’Connor, head of pensions and savings at Interactive Investor, warned there is a risk that people assume they will not spend as much as they enter their seventies and eighties, which turns out to be false.

She said: “People imagine they won’t want to go out as much and won’t be going on as many holidays. Even if that is true, new and unpredictable requirements to spend can come in later in life and blow the budget. 

“If people end up spending more than they expected as they age, there is a chance they could exhaust their pension pots too soon.”

The IFS also discovered differences in spending patterns across different types of households. 

Households with above-average incomes for their age and birth cohort have an increasing profile of spending in their sixties and seventies, with spending falling slightly for those in their eighties. 

However, increasing incomes mean that more people save and at higher rates as they get older, the study showed. For example, for those born in 1939–43, 59 per cent saved at age 67, but this rose to 69 per cent by age 75. 

Given the state pension tends to rise faster than prices over time, a declining profile of income from private sources might be appropriate, particularly so for those who rely more on the state pension,  the IFS noted. 

If individuals are largely reliant on private pension income, a non-index-linked annuity would leave them more exposed to inflation.

The IFS pointed out that the death of one member of a couple would affect the expenditure of the surviving partner because shared expenditures such as housing costs will not decrease when their partner dies. 

Households need to consider how such changes in circumstances such as this will affect income and spending to ensure they have enough resources to be able to fund increases in per-person spending,  the institute warned.  

“Future retirees, who are less likely to have occupational or state pensions with a survivor’s benefit, will have to decide how to take this into account when deciding speed of drawdowns and whether to buy an annuity that provides survivor’s benefits,” it added.

Tully said this is particularly important given the current cost of living crisis and rising inflation.

“With the cost of living crisis at the front of everyone’s mind, those on fixed incomes such as pensioners will have fewer levers to pull to get through the challenges we face,” he added. 

“Many of those who need to are already tightening their belts, reducing their energy consumption, going out and eating out less often or changing shopping habits, and this will only get worse as inflation grows through the year.”