Retirement & Financial Planning Report

Retirement planning often is based on an assumption that certain expenses will decrease and the household will be able to maintain the same lifestyle on less income, but a new report cautions that many expenses for retirees are largely fixed because that money is spent on basic needs.

Expenses on five of those needs–housing, health care, food, clothing, and transportation–account for about 80 percent of a retired household’s spending, said a report from the Center for Retirement Research.

Since retirees “have little ability to increase their income compared to working households” they would largely have to try to offset any increases in those costs with cutbacks elsewhere. Retirees also face potential financial shocks, it added, with main ones related to increased medical expenses due to a health condition and to a reduction in income when a spouse dies.

“If necessary, households could cut back on entertainment, gifts, and other ‘non-basic’ items, which include cable TV or a cell phone,” it says. Spending on basic needs could be “trimmed” but typical retirees cannot cut expenditures on them “by more than about 20 percent without experiencing hardship.”

“The most effective response for households approaching retirement is to increase their retirement income and reduce their fixed expenses. Working longer, annuitizing wealth, and taking out a reverse mortgage would increase retirement income. Downsizing is the most effective way to reduce fixed expenses and could also increase the household’s financial assets,” it said.