An assessment of whether projected retirement income will be adequate to meet projected future needs may be inaccurate unless it takes into account how spending patterns may change in retirement, says a report by the Center for Retirement Research.
For example, it says that “financial planning tools typically assume that households require a level amount” by assuming that spending in retirement will remain steady except for annual inflation-related increases.
However, “spending does decline as people age” with higher spending rates for those in their 60s and significantly lower rates by age 85. “Households accept declining consumption in retirement, because they are less willing to save during their working years to support consumption at ages when they are less likely to be alive. With a declining consumption path, the typical household will need to accumulate much less wealth to meet any target replacement rate at retirement.”
Another key issue is whether financial support is still being provided to children at retirement and whether that support will continue afterward. “One hypothesis is that the parents keep household consumption steady by spending more on themselves, particularly on discretionary items such as travel, entertainment, and restaurants,” it says.
However, if the parents do not increase spending in other ways once they are no longer financially supporting children, “they need to save less than households whose consumption remains steady.”