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“Retirement is the only time in your life when time no longer equals money.” – Unknown
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In recent years, a great deal of information has surfaced about spending patterns in retirement. One of the most commonly accepted theories is the theory of “U-shaped” spending. The U-shaped spending pattern indicates increased spending at the beginning and the end of retirement, with less spending in the middle phase. These spending patterns create a U-shaped design of retirement spending.
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But is This U-shaped Pattern of Spending Valid?
Let’s look individually at each phase of retirement:
Phase 1: Exploring (Ages 55-70)- GoGo years:
- Increased spending on healthcare before Medicare– it’s not uncommon to have a spike in spending due to increased health insurance costs. Workers who retire before qualifying for Medicare must provide medical insurance coverage if not offered as part of their retirement package. Healthcare premiums paid by an employer must now be paid by the individual, resulting in increased spending on health insurance. This additional spending for health insurance continues until the person or couple qualifies for Medicare coverage.
- Increased spending on dining– retired people or couples may not want to spend time preparing meals at home. Less time preparing meals at home means more meals eaten away from home. Dining out can be a costly and significant early retirement expense.
- Increased spending on lavish trips and travel expenses– retirees in this first stage of retirement are said to be in their “GoGo” years. Early in retirement, most people are still active and healthy enough to travel extensively. While they are still healthy, retirees like to front-load expensive and aggressive Travel. Traveling while they are young and healthy enough to navigate extensive and expensive trips makes sense, but increases spending in early retirement.
- Spending for home improvement– many pre-retirees and early retirees spend on home improvement and home upgrades. Delayed maintenance of homes is usually addressed at the time of retirement or shortly thereafter. Most retired people realize they will spend more time at home and want to be as comfortable as possible. Many retirees also spend money on home improvements to increase their ability to “age in place” in their homes.
- Hobbies– old hobbies that have been unaddressed may be rekindled, and new hobbies started. Activities are needed to fill in the time spent working. Many activities are free, but most hobbies require some expenditure of money.
- IRMAA– Individuals or couples who receive income from any source may have to pay IRMAA (Income Related Monthly Adjustment Amount) surcharges. These surcharges can add thousands of dollars in payments each year and may not be anticipated or factored into a retirement budget.
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Phase 2- Nesting (Ages 70-85)- SloGo years
- Less emphasis on travel– health problems and lessening desire take their toll on extensive travel and travel expenses. Less traveling means less money spent on travel.
- Less dining out and entertaining– As people age, they tend to become more homebound and dine out less often. Health and mobility problems may limit the ability to dine away from home.
- Little or no emphasis on home improvement– since most home improvements are completed early in retirement, there is generally a decrease in money spent on home repair and maintenance. The home that my wife and I just purchased had not had very little maintenance completed in seventeen years.
- Decreased spending on hobbies– money may be spent on ongoing hobbies, but less money is spent exploring new hobbies.
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Phase 3- Reflecting (Age 85- )- NoGo years
- Increase in healthcare spending-it’s normal to associate an increased budget for healthcare spending with increasing age. My Medicare spending has decreased in the past year as IRMAA surcharges have decreased. IRMAA surcharges are based on taxable income. For more information see: UNDERSTANDING IRMAA: WHAT IT MEANS FOR YOU. Basic Medicare premiums are indexed for inflation and usually increase yearly. My Medicare supplemental insurance has also risen over the past few years. If the extraordinary IRMAA surcharges are deleted, basic Medicare insurance expenses still increase annually.
- Funeral expenses for a spouse– as couples age, the fact that one or both die becomes more of a reality. Funeral and legal expenses drive up the cost of living when those events occur.
- Increased tax liability when one spouse dies– tax brackets for single filers have lower income levels based on single income. Widows and widowers may experience this torpedo when income and MRDs are taxable to one person instead of a couple.
- Home health or hospice– only a minor percentage of Americans (approximately 4%) have long-term care policies. Expenses associated with home health or long-term care become a personal expense. In extreme cases these expenses can derail even the best retirement plans, as they may continue for years.
- Assisted living or CC facilities– this situation is similar to the one listed above. Most of these expenses are borne solely by the consumer who utilizes these facilities without the benefit of long-term care policies. In some cases there is a minimum amount of Medicare-based coverage, or Medicaid coverage(which has many requirements.)
- Long-term care expenses– Only 3% to 4% of Americans 50 and older pay for a long-term care policy, according to LIMRA, an insurance marketing and research association. That stands in stark contrast to federal estimates that 70% of people 65 and older will need critical services before they die.
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Like most things in retirement, I feel that general statements are just that – general statements. Each person‘s situation is unique and may not reflect the same levels of spending and time frames described above.
I would generally accept that spending declines for most people as Retirement progresses. I would question the fact that there is a spike in spending towards the end of a person’s life.
In my mother‘s case, she lived in an assisted living facility for several years at the end of her life. Because she sold her house and had very few outside expenses, her assisted living facility expenses were not measurably higher than her independent living expenses. Medicare and her supplemental policy provided for her medical needs. Probably the largest out-of-pocket expense in her last years was for prescription drugs not covered by Medicare or her private insurance.
In my particular situation, my wife and I would be ranked as Nesting or in the Slow-Go years (Ages 70-85.) We have not experienced the drop in spending associated with this period of life. Our spending has remained the same as in earlier years, and this year we will see an increase in spending with the purchase and renovation of our new home.
These numbers, ages, and spending patterns should be defined as a broad and general outline for those in and approaching retirement.
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Final Thoughts
Having an idea of the future helps to plan for life’s eventualities.
Each person must evaluate and assess their spending patterns and the effect of different ages on these patterns of spending.
Readers need to understand the ages and patterns listed are not facts and may not fit your situation.
I’m not sure that I agree with the U-shaped spending theory. Most people spend more money earlier in retirement, and spending gradually declines from that point until death.
The traditional U-shaped diagram may be more of a modified U-shape, or a pitcher design with a high end at the beginning of retirement, a decline in retirement’s middle years, and a flat or slightly rising tail at the end of life.
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