The myth of the U-shaped retirement

Abraham Okusanya is a friend to this blog; I’m pleased he’s sharing his latest research on how we spend money in retirement. We don’t always agree about the answers , but we agree about the questions!

If I had a pound for every time someone in financial services talks about spending in retirement as being ‘U-shaped’, I’ll probably have enough money by now to never have to work again!U Shape-Retirement-Expenditure-Graph

You’ve probably seen this image on spending needs in retirement before. It’s a rather commonly held view (see this, this and this) that most people spend more early in retirement, when they’re active and keen to enjoy their new-found freedom. Then they go into a less active stage where spending declines, only for it to pick up dramatically in later life due to care costs.

Sounds logical, right?

The trouble is, for the majority of people, this idea of ‘U-shaped’ spending in retirement is but a myth.

For some time, researchers have identified an important phenomenon known as the ‘saving puzzle’ – older people keep accumulating assets in retirement and the amount of money they save increases with age!

Dr Brancati and her colleagues at the International Longevity Center – UK recently conducted a detailed analysis of two large datasets namely, the Living Costs and Food Survey and the English Longitudinal Study of Ageing to gain insight into income and expenditure patterns of the older population. Their findings are set out in a recent paper titled Understanding Retirement Journeys: Expectations vs reality. The researchers note the absence of the U-shaped spending in retirement…

Our findings suggest that typical consumption in retirement does not follow a U-shaped path – consumption does not dramatically rise at the start of retirement or pick up towards the end of life to meet long-term care related expenditures. At this point it should be noted that our data is restricted to households only and therefore excludes those actively living in care homes who may be paying for it from their remaining assets. Yet we can explore the extent to which care expenditures eat into household budgets across different ages. Analysis of the data suggests that even for the 80+ age group, only a minority (6.4% of households) are putting money towards meeting long-term care needs. This doesn’t mean that U shaped consumption in retirement is a misnomer, but perhaps implies that it is atypical.

Typical consumption in retirement does not follow a U-shaped path! Click To TweetAs it turns out, spending in retirement actually declines progressively in real terms. As people get older, they spend progressively less!

A household headed by someone aged 80 and over spends, on average, 43% (or £131) less than a household headed by a 50 year old. If we include the amount of money people pay for their mortgage as household expenditure, then the decline becomes even steeper with households headed by someone aged 80+ spending 56.4% less (or £173) than households headed by a 50 year old. Indeed, we calculate that by age 80+, individuals are saving, on average, around £5,870 per year!.

The next chart below shows that, from age 65, spending typically declines progressively and is about 35% lower at age 80.

Retirement Spending Path 1

Even when researchers split people aged 50+ between top and bottom earners (i.e. people whose income is either above or below the median), the trend remains broadly consistent. People spend progressively less as they get older. However, high earners experience a much faster and steeper decline in spending after age 60 than bottom earners. Indeed, bottom earners have more stable spending patterns throughout their lifetime, and their total expenditure starts to decline only after age 70.

Retirement Spending Path 2

The authors concluded that older people spend consistently less than their younger counterparts regardless of their income. This trend is persistent and it’s not a periodic effect.

‘Consumption in retirement starts relatively high and ends low. This pattern is common to both high and low income groups, is robust to the inclusion of factors other than age and is not simply the result of the time period in which the data was collected.’

Amazingly, this trends is broadly consistent even when you look at segments of people with different lifestyles. The authors note even the “Extravagant Couples” – those who spend nearly 40% of their total expenditure on recreational goods and services – spend more than their income in the first decade or so of retirement, as do those who are “Just Getting By”, while the “Prudent Families” and “Frugal Foodies” consistently spend below their income over the duration of retirement

All of the groups save in later life. From age 75 onwards, even the “Just Getting By” group, which is the lowest income group, starts to save. The savings are the consequence of falling consumption towards the end of life on non-essential items.

U Shape-Retirement-Expenditure- Not

These findings are consistent with findings in the US, where researchers found that retirement spending tends to decrease by at least 1% a year in real terms throughout retirement!

Of course many people will need care in later life, but this is not typical. Consider the following data from Age UK (2016).

  • only 16% of people aged 85+ in the UK live in care homes
  • the median period from admission to the care home to death is 462 days. (15 months)
  • around 27% of people lived in care homes for more than three years, and
  • people had a 55% chance of living for the first year after admission, which increased to nearly 70% for the second year before falling back over subsequent years.
  • approximately 30% of people use some form of local authority funded social care in the last year of life

While it’s important to factor in possible care costs into a retirement income plan, the chances that someone actually ends up having to pay for care are relatively low. In any case, it’s entirely practical for people to rely on their property wealth to meet care costs in later life, as Paul Lewis elegantly argued in his recent piece. And while it may not always be ideal, local authority funded social care remains the last resort under current law.

Want more in-depth research-based insight on retirement income? Join leading academics, researchers and financial planners at the Science of Retirement Conference on the 1st of March, 2017.



So what?

The assumption that income withdrawal needs to keep up with inflation throughout the entire retirement period is not supported by empirical data on spending pattern in retirement. This has a major implication for how we calculate sustainable withdrawal from retirement portfolios. An ideal sustainable withdrawal strategy should follow the typical spending pattern in retirement. This allows higher withdrawal at the early part of retirement and should progressively fall (at least in real terms) over their retirement period.

An ideal withdrawal strategy should follow the typical spending path in retirement. Click To TweetA major weakness of first version of the sustainable withdrawal rate framework developed by Bill Bengen is that it assumes expenditure remains constant in real terms throughout retirement. This is inconsistent with research findings on how consumption actually changes in retirement.

Thankfully, a range of flexible withdrawal strategies have been developed to reflect likely changes in retirement spending. I’ll be exploring these strategies over the coming weeks.

Keep reading…





Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.
He holds a Master’s degree from Coventry University and an alphabet soup of qualifications, including the Investment Management Certificate, Chartered Financial Planner, CFP and Chartered Wealth Manager designations. He was one of 5 finalists for the Professional Advisers Personality of Year Award 2015 but the award went to a more deserving winner, obviously!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to The myth of the U-shaped retirement

  1. I recognise something slightly different – an ever increasing amount of income needed to support children and aging parents.
    I have never really agreed with The U shaped income pattern but think t dangerous to reduce ability to get income later in retirement

  2. bobchampion says:

    Billy highlights the problem with dealing with averages when it comes to retirement spending.
    For every person that has the family liabilities he mentions there is a person who has no family or liabilities other than themselves. Both groups sub divide into those who enter retirement with more buckets of things to do than they will ever have time for, whilst others just want a good rest.
    By the time we reach retirement our personal spending, has become almost unique to ourselves. The individual has to strike a balance between what they have, what they must / want to spend on, and the financial risks of retirement. They are themselves a statistic but not average.
    The care statistics in the blog ignore the 2 million who provide 20 hours a week or more unpaid care. They fall under the radar. (2011 census).
    Also, the median stay in a care home may be distorted by those who go into residential care “to die”. I believe the average payment period for immediate needs annuities is 4 years and 1 in 12 are paid for more than 8 years.

  3. henry tapper says:

    There are patterns in retirement spending which are important in designing decumulation strategies. Understanding what a typical consumption pattern is, is half way to working out how a default decumulation strategy would work. The other half is harder – making sure the money doesn’t run out!

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