How spending needs change in retirement

28 Feb How spending needs change in retirement

If I had a pound for every time someone in financial services talks about spending in retirement as being ‘U-shaped’, I’d probably have enough money by now to never have to work again! It’s a commonly held view 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 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!

In a paper, titled Understanding Retirement Journeys: Expectations vs reality, Dr Brancati and her colleagues at the International Longevity Center – UK recently conducted a detailed study of income and expenditure patterns of the older population. The researchers note the absence of 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… This doesn’t mean that U-shaped consumption in retirement is a misnomer, but perhaps implies that it is atypical.

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


All 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.

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,
  • 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, and
  • 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 ends up having to pay for care are relatively low.

Ultimately, each person’s spending pattern in retirement will be different. A lot depends on the choices we make about what we want out of retirement. At Tandem, we work with our clients to visualise their own retirement journey and craft their financial plan accordingly.