New research from U.S. asset management giant T. Rowe Price finds that, contrary to conventional planning assumptions, retirees actually tend to reduce their spending to match their income and preserve their assets.
The firm published a white paper based on data from the University of Michigan’s Health and Retirement Study, which found that retiree spending declines annually by 2%.
“This finding is significant,” the firm said, because traditional retirement planning assumes that retirees want to maintain a certain standard of living or level of spending.
In fact, the firm said that the data indicates that “retirees tend to adjust their spending to match their income so that they can avoid drawing down their assets.”
Notably, the analysis found that retirees choose to adjust their spending on non-discretionary items, such as food and shelter, to match their guaranteed income from sources such as Social Security and pensions, “challenging the conventional notion that these expenses are truly fixed.”
The firm said that its findings suggest that retirement planning should focus on products and services that are consistent with the observed behaviour of retirees.
“Understanding how retirees spend is crucial to aligning retirement income solutions,” said Sudipto Banerjee, vice president, retirement thought leadership at T. Rowe Price, in a release. “Plan sponsors and financial professionals need to understand the motivations behind retiree spending in order to provide optimal retirement income solutions.”