Plan for fluctuating retirement expenses to support your nest egg

Preparing for spending increases could improve likelihood for success in retirement.

September 2023, From the Field

 

Key Insights

  • Data show that spending generally decreases in retirement, but many retirees could also experience varying spending increases.
  • Essential (nondiscretionary) expenses—housing in particular—are the primary sources of spending variability in retirement, but this tends to vary with income.
  • Maintaining sufficient liquid assets, while continuing to invest for growth, could help retirees adjust to spending fluctuations and bolster retirement outcomes.

 

Written by

Sudipto Banerjee, Ph.D. Vice President, Retirement Thought Leadership
From the Field

A growing dividend can add up

Don't overlook the long-term appeal of a rising dividend.

Appendix A

Change in spending across waves can be exaggerated in the presence of reporting or measurement error (the survey follows a group of households from 2005 to 2019 that were present in the 2005 CAMS, were at least 65 years old, and have been surveyed in at least three consecutive waves of the CAMS). The most recent wave was released in August 2021. We took several steps to mitigate the effect of measurement error in the analysis. First, we dropped all observations (household wave) that were in the top and bottom 1% of the spending distribution. Second, some spending categories were split in the early waves of the CAMS. The CAMS recorded 39 spending categories consistently between 2005 and 2019. So, we restrict our data between 2005 and 2019. Third, we restrict our sample to households that have been observed for at least three consecutive waves of the CAMS. Finally, we excluded observations with inter‑wave change in total household spending exceeding 150% (in absolute terms).

Appendix B

To estimate how much of the variation in total spending is explained by different components of spending (as shown in Figures 3 and 4), we used panel regressions with household fixed effects. In particular, the reported R2s are within the household variation across time explained by each component of spending. For each regression, the only explanatory variable used is the component of spending for which the R2s are reported. In other words, no other covariates such as demographic controls were used as the primary interest is only on the percentage of overall variation explained by each component of spending rather than any point estimates. R‑squared (R2) is a statistical measure that represents the proportion of the variance for a dependent variable that’s explained by an independent variable in a regression analysis.

Appendix C

To estimate the correlation between change in financial satisfaction and change in different types of spending, first, we created a binary variable. Those who reported that they were either “a little less satisfied” or “much less satisfied” were grouped as “unsatisfied.” Everyone else was put in the other (base) category. This binary variable was used as the outcome variable in a linear probability model to estimate the correlation between change in satisfaction and change in types of spending (discretionary and nondiscretionary). Additional demographic controls used were gender, race, age, change in marital status, and change in financial wealth between 2012 and 2018.

Actual outcomes may differ materially from estimates and probabilities provided in this Insights. Altering data inputs of the analysis shown in this Insights could yield different results.

IMPORTANT INFORMATION

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material 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 the primary basis for investment decision‑making.

Any tax‑related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

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

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Fixed‑income investments are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., distributor, and T. Rowe Price Associates, Inc., investment adviser.

© 2023 T. Rowe Price. All Rights Reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. RETIRE WITH CONFIDENCE is a trademark of T. Rowe Price Group, Inc.

ID0006377 (09/2023)
202310‑3171669