retirement savings  |  march 8, 2022

Podcast: How Retirees Really Spend

We save for retirement over several years, but when we are retired, how do we know how much we can spend so our money will last?


In this episode, host Michael Davis is joined by Sudipto Banerjee and Stuart Ritter. Listen to learn more about retirees’ most common expenses and how you can prepare for your future retirement spending needs.

Sudipto Banerjee, Ph.D., is a senior manager in the Retirement Thought Leadership group. He is also a vice president of T. Rowe Price Associates.

Stuart Ritter, CFP®, is the Retirement Insights leader for T. Rowe Price U.S. Intermediaries. He is on the board of MakingChange, a nonprofit community organization that supports financial education.

View Transcript ▾

Michael Davis: Welcome to T. Rowe Price's CONFIDENT CONVERSATIONSTM on Retirement. My name is Michael Davis, and I'm thrilled to be your host. I've spent my career working to help people build a durable retirement. It is such an honor to do this work and an even greater privilege to be with the retirement experts that are here with us today. These professionals can help you feel more confident about your own retirement, whether you're planning for retirement or already there.

Today we're talking about retiree spending. I'm joined by T. Rowe Price experts, Stuart Ritter, a CERTIFIED FINANCIAL PLANNER™ and frequent speaker on retirement topics, and Sudipto Banerjee, a Ph.D. economist who has done extensive research on a variety of retirement topics, including how retirees spend during retirement. Welcome to the show, gentlemen.

Sudipto Banerjee: Thank you.

Stuart Ritter: Thanks, great to be here.

Michael Davis: Great to have you here. So, there's a lot of information out there about saving for retirement, but we don't see as much about how to spend those dollars in retirement. You still have bills to pay, right? It's not like the phone company says, "You're retired now. You've worked hard. You don't need to pay us anymore." That's not the way it works. So, the research that we've done and I've seen suggests that retirees are anxious about running out of money and about not having enough to pay for the things that are really important like health care. And that can really be a confidence killer.

So, first question. Most people work hard. They save diligently throughout their careers so they can have a fulfilling retirement, but then when the time comes, people seem hesitant to spend the money that they've saved. So Sudipto, is that consistent with your research?

Sudipto Banerjee: Yes, this is really interesting because this goes in completely opposite direction of what we have always assumed what retirees would do. Because our entire retirement planning and advice, everything is kind of based on the assumption that retirees would like to preserve their preretirement lifestyle. And to do that, they would spend down their assets. But in practice, when we look at the data, what we see is that retirees are doing the opposite, which is they are okay with cutting down their lifestyle a little bit, but they really want to hold on to their assets. So, we have recently published some research on how retirees spend their money during their retirement. And we estimated that, on average, every year from 65 onwards, their spending goes down about 2%. And then on the other side, we have seen research, which shows how their assets change during their retirement. And what it shows is basically in the first two decades of retirement, on average, they're spending down nearly about 1/4 of the assets that they had at the beginning of retirement.

And again, this varies. So, for example, people who had like more than $500,000 in liquid assets at retirement, in their first two decades, they spend down only about 12%. So, we could see that a lot of people are just holding on to their assets and they're cutting down on their spending. We call this asset preservation.

Stuart Ritter: Sudipto, you mentioned that people spend 2% less each year. You're talking about them spending 2% less than the inflation rate. So, what's going down is the real spending, just to make that clear for folks?

Sudipto Banerjee: Right. That's a great point, Stuart. Thanks for pointing that out. The other aspect that I missed is, “Why do we think retirees are doing this?” And I think there broadly two sets of explanations. So, the first set is what we would call rational explanations, like what Michael, you just mentioned at the beginning. They have concerns about health care costs if they might need to move into a nursing home or something like that. So, they just want to preserve those assets so that if something bad happens, they have the money. And then on the other side, what we call there are the behavioral reasons.

We save for retirement for over 30, 40 years of our careers and we build up this habit. And the question is, “Can you really change that overnight?” So, I think a lot of people struggle with that. And inherently some people have a saver’s mentality, so they're just not comfortable in just spending down their money. But whatever these explanations are, I think it tells us that we really need to rethink about how we go about planning for retirement spending.

Michael Davis: That's really fascinating and almost counterintuitive. It sounds like people who've saved more may be less likely to spend it.

Sudipto Banerjee: Exactly.

Michael Davis: So, there were some behavioral aspects to all of this. So, does this mean that retirees are doing something wrong? Stuart, shouldn't retirees enjoy their hard-earned savings?

Stuart Ritter: Let me focus in on the word you just used, the word enjoy. What's important for people to focus on here is what makes them happy. What is their preference? And we at T. Rowe Price actually bake that into a lot of the work we do. And it comes into play here as well in the sense that for some people, they get more enjoyment from saving money and having that balance than they do from spending it on something. So, for those who are listening to this podcast, recognize that there is no right way when it comes to how you're managing your money in retirement, recognize that while some people, as Sudipto pointed out, see their balance as something to spend on things, and those things and experiences and so forth are what's going to bring them that enjoyment. There are also people who gain enjoyment just from having the balance itself. That when they look at that money, it represents the ability to handle an expense they might have in the future as Sudipto mentioned, it represents options they might have, it may represent security. So, the balance itself is its own source of satisfaction. And therefore, if that's what makes them happy, that's okay.

Michael Davis: That's so fascinating. I just think these behavioral dynamics are really interesting and just drive a lot of saving and spending behavior. So, as we think about differences across different groups of savers and retirees, Sudipto, is this behavior of reducing spending and holding on to assets, is that common to everyone, or do you see differences across different groups of savers?

Sudipto Banerjee: When we looked at retirees who are essentially in the top 20% in terms of their net worth, which was people who had net worth of more than $667,000, their spending actually declined faster. So, it was about 2.7% every year. And then, on the opposite side of that, people who were in the bottom 1/5 in terms of their net worth, their spending was essentially flat. The rate of decline was 0.3%, which is almost nothing, so that tells you that there is a lot of difference across the spectrum.

People who are sort of at the bottom of the asset spectrum. So, they are spending at a very low level, and there is something we call spending floor or subsistence level of spending that you just cannot spend less than that. Just to survive, you need to spend a minimum amount. And these households almost are near that level of spending. So, they really cannot cut their spending.

So, people with more assets, they are cutting their spending on both their discretionary and nondiscretionary items. That's just because they have more flexibility in their budget.

Michael Davis: So, on this idea of retirees reducing their spending, how do you think they're doing that, Stuart? How are they doing that from your observation?

Stuart Ritter: What the data shows us is in the early part of retirement, people are adjusting their spending to match whatever's coming in from those sources of steady income, Social Security, pensions, and any annuities they might have. And the block of spending categories that they match to that income are essentially five things. It's housing, transportation, health care, food, and clothing. So, you can kind of think of those as the foundational five, kind of some of the basic expenses that people have. And what we see people doing is they manage their spending within that block of categories so that if something goes up in one area, then they cut out something in another area. So, for example, if they have a year where maybe they spend a little bit more on health care, then they might travel a little bit less or go to a cheaper destination or maybe eat out less frequently, make more meals at home and that brings their expenses in those categories down. So, the data's showing some adaptability that people have.

Michael Davis: Go ahead, Sudipto.

Sudipto Banerjee: To Stuart's point, it's also the fact that some of these adjustments, it kind of happens automatically because if you have a health episode, that you get sick or hospitalized or something happens to you, then some of the other expenses, they automatically they go down. So, if you are sick, you are not traveling. So, some of these adjustments are kind of built in.

Michael Davis: So, Stuart, you talked about sources of guaranteed income, Social Security, pensions, and other income streams, but lots of people may not have access to pensions anymore. The 401(k) is becoming a much more central retirement vehicle. Are people making dramatic changes to adjust to these spending needs with the absence of that stream of income?

Stuart Ritter: Well, what you've got is most people are getting Social Security. So, they're adjusting to that. And what we talked about at the beginning of the podcast was essentially, what are people doing with the money that they've saved, with that balance in a 401(k) or an IRA? Wherever they have the money that they've decided is dedicated to retirement, “What are they doing with that?” And for some people, they're spending it. They're making withdrawals on a regular basis to maintain the lifestyle that they had before retirement and the one that they want in retirement. Other people are saying, "I'm going to do what I can to leave that balance intact and instead I'm going to be moderating my spending." So, I'm actually going to bring my lifestyle down. If they think about the first year of retirement, I buy a certain basket of goods and services. Then the next year, I'm actually buying fewer goods and fewer services.

Michael Davis: Terrific. Sudipto, I think you had a comment?

Sudipto Banerjee: Yeah, and I think there is a lot of trial and error going on when people retire. And on that point, people are just not sure how much they could safely spend. And so, as a result, some people spend more, some people spend less. But after four or five years, we see that people sort of come into some sort of an equilibrium. But before that, we see there is a lot of adjustment going on.

Michael Davis: Yeah, so that does take us to our next question around this notion of trial and error. And so, I think what you both are essentially saying that people are cutting their spending to adjust to the savings that they have and certainly sources of income. How are they deciding how much to cut in spending?

Sudipto Banerjee: Basically, what we found in the data is whatever guaranteed income or the flow that's coming every month, they are using that to fund their necessary spending. So, before retirement, we all get a paycheck every month. And from our paychecks, we are essentially paying out our mortgage, our utilities, all these expenses. So, we have been doing this for 30 years, 40 years. And then it is only natural that after we retire, we just continue that same process. And so, the guaranteed income that is coming to them they are basically using that as their paycheck, and they are making all these necessary payments out of that paycheck. But the behavior is pretty consistent if you look at throughout our life cycle, that's what we learned throughout our working life and that's what retirees continue to do.

Michael Davis: Really thoughtful. Stuart, do you have any comments on that question?

Stuart Ritter: Let me go back to some of the ways that people are making these adjustments because very often when people hear words like housing or transportation or health care, there's an assumption that there is no wiggle room in there. There is no discretion that people have to spend whatever they were spending before. And the reality is that we come across all kinds of examples of people making these adjustments. So, within the housing category for example, are home furnishing. So, we heard a story of someone who was interested in replacing their couch and had another expense come up. So, they didn't replace their couch. Now that sounds kind of silly, but it's the kind of thing that people do to adapt to their circumstances. So, someone might decide I'm not replacing the couch this year. I'm not making changes. I'm not going to redo the kitchen.

There's some variability within the spending that they're doing. In transportation, very often you have a choice between repairing the car that you have or buying a new car. And someone may decide, okay, I'm going to keep my transportation costs moderated by doing a repair instead of buying a new car. So, recognize that part of what's going on is the resiliency people have and applying that to these different situations. As Sudipto pointed out, folks figure out what their steady income is. And then within this group of these kind of foundational expenses are making these changes on an ongoing basis. And that's what helps them feel confident that they're going to be able to have their money and their income and the lifestyle that they want, whatever it may be as they adapt along the way continue all the way through retirement.

Sudipto Banerjee: And Michael, I would just add, that couch example Stuart was referring to, that's actually my mom.

[All laughing]

Stuart Ritter: Yeah, I stole it. Yeah.

[All laughing]

Michael Davis: Oh, that's fantastic. Well, this has been such a great discussion, and I feel like we've covered a lot of terrific ground. Why don't we summarize some of the key takeaways for our listeners? And how about you start, Stuart, then we'll go to Sudipto.

Stuart Ritter: One of the key takeaways that I'd love people to take from this is do what makes you happy. Let's say you've got somebody who wants to take some of their balance and buy art. And they want to put that art on the wall. And every time they look at it, it brings them happiness. That's great.

There are other people though who would rather take their account statement and put the statement on the wall. And every time they see what their balance is, that's what brings them happiness. And it's not as if we should say to them, "Oh, you're doing it wrong. You should take some of that balance and go out and buy say, some artwork and put the artwork on the wall instead and look at that." If looking at the balance gives them more satisfaction than spending it on something, then that's what they should do. And for the first person, if taking the money and buying the artwork gives them more satisfaction, then that's what they should do. That's the kind of thing we're talking about. Decide what makes you happier. For some people, it's spending the money, for other people, it's saving the money, and do that.

Michael Davis: Well said. How about you, Sudipto?

Sudipto Banerjee: Yeah, so there are quite a few things I think individual retirees could do. So, first of all would be to figure out their budget, what their spending is going to look like when they retire. When I say budget, I mean, if possible, down to every penny. That would help a lot because once you figure out what you are going to spend, then you know that what income sources you have and then you can see if there are any gaps and then you can figure out what to do about that. Do you cut your spending more, or do you fill those income gaps by getting income from other sources?

Michael Davis: So, it's hard to believe that our time is already up. But before we go, we always want to leave our listeners with an action step they can take, something they can do to move closer towards this idea of a fulfilled and confident retirement. So, any key action or next steps that you all would recommend for our listeners? I'll start with Sudipto.

Sudipto Banerjee: If someone is comfortable working with a financial professional, talk to them about how comfortable they are about spending down their assets. If you know that this is what I'm going to spend, and I have the money to back that up and you know that money will be coming month in and month out. So, I think that essentially helps them to have more confidence in their retirement.

Michael Davis: What about you, Stuart?

Stuart Ritter: Go beyond the math. The math is critical. Understanding what your assets look like, what your income looks like is important. At the same time, focus on the other side, figure out what your vision for retirement is, understand who you are as a person. Emotionally, what is giving you satisfaction? Are you a spender? Are you a saver? And put both of those together so you have a more holistic understanding of yourself and then a more holistic understanding of what you can do to be confident in retirement.

Michael Davis: Great discussion. So, I just want to thank you both again for joining us today. It's been an absolutely terrific conversation. And if you would like to hear more from Sudipto or Stuart, check out their episode on retiree health care costs.

Again, I'm Michael Davis. I want to thank you all for listening. Be sure to join us for our next episode on individual retirement accounts, also known as IRAs. If you like this podcast, please rate us and subscribe wherever you get your podcasts. Until next time, be well and I wish you all many confident tomorrows to come.

Important Information

The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness.

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal.  

View investment professional background on FINRA's BrokerCheck.



Next Steps

This episode of CONFIDENT CONVERSATIONSTM on Retirement is provided for general and educational purposes only, and is not intended to provide legal, tax, or investment advice. This podcast does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as a primary basis for investment decision-making.

Investors will need to consider their own circumstances before making an investment decision. All investments involve risk, including possible loss of principal.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The material has not been reviewed by any regulatory authority in any jurisdiction.

The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

IRAs and retirement accounts should be considered long-term investments. Both IRAs and retirement accounts generally have expenses and account fees, which may impact the value of the account. Maximum IRA contributions are subject to eligibility requirements. Early withdrawals are subject to taxes and possible penalties. For more detailed information about taxes, consult a tax attorney or accountant for advice.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness.