Retirement Spending Habits

One of the things that intrigued me in class this week was thinking about the spending habits of those in retirement age. During a person’s lifetime, they’re theoretically preparing for retirement and planning their financial future. With the Baby Boomer generation starting to leave the workforce, it’s important to know their spending habits in order to predict how the economy will change as we depend on their consumption habits for economic growth in lieu of their work. According to TIME, the majority of retiree’s spending goes to their homes since they overwhelmingly choose to maintain their mortgage as opposed to paying it off.

The Bureau of Labor Statistics put together a helpful profile of spending patterns for older Americans and looked at the changes from previous surveys. In 2014 older households (55 or older) made up 41.5% of the Consumer Expenditure Survey with an average household income of $58,528 for the group as a whole. Average income was higher for 55-64 which would make sense since they’re still working instead of relying on their retirement savings like hose in the above 75 group. Housing continued to be the largest expenditure overshadowing the second largest, Transportation (33% compared to 17%).

While these figures may not seem very shocking, it paints a grim picture for the future since retirees are not remaining productive members of society. Even as they spend, their habits are skewed towards things like housing which do not have any grand returns to the economy. As retirees become a larger group in society, those who are working-age will have to make up for lost economic growth and decreases in consumption. 

https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm

http://time.com/money/4123785/retirement-spending/

9 comments to Retirement Spending Habits

  • ghimirer17

    It’s interesting that you note that a lot of people who retire are still maintaining their mortgage and how this will not have grand returns to the economy. In terms of spending habits, I am surprised that health care is not in the top two – because I would assume that this is what would go up as you age – especially according to the graph that was shown in class on Thursday about how in other countries, spending starts to decrease after you hit old age, but in the United States, spending actually rises after hitting old age (I attributed it to rising healthcare, especially the cost of medication – but this table makes me rethink that thought). I wonder why housing is higher than this, and why the attitude is to not pay off the mortgage – is it because they are unable to? or because they choose to?

    • Only the co-pay of Medicare would show up in the survey. Likewise things covered by other insurance would be excluded. That is, if you don’t write a check (er, swipe a card) to pay for it out of your own resources, it won’t show up in personal expenditures.

  • dawejko

    I think it unfair to say the elderly population has no returns to the economy. Baby Boomers experienced the highest wage growth relative to growth in their productivity out of every generation. They have money to spend and whether they spend it on mortgages, retirement housing, consumer goods, or healthcare products, they are still making a big impact on our economy. Forecasting Millennial’s purchasing power when we hit retirement is scary, because our generation will have very little savings and no social security. So basically if you think the Baby Boomers aren’t adding to our economy, just wait until our generation hits retirement and can’t afford anything.

  • wedmonds

    Great point Dawejko: compared to Baby Boomers, there is little to no chance that Millennials, once retired, will contribute to the economy in the same magnitude. However, if the retirement age is raised to account for the flawed social security system, maybe Millennials 65 and older will. Another thing to think about: as Professor Smitka mentioned, only the co-pay is included in expenditure because of medicare. Now, if medicare were to ever change, the contribution of retirees to economic growth would skyrocket.

  • ellingerw17

    I agree with Dawejko, while this graph does seem scary, I think it is unrealistic to assume that baby boomers and the elderly population have no returns to the economy. However, it is certainly evident that things will need to change moving forward with social security or else we are indeed in big trouble.

  • dawejko

    Maybe we can take some of the 53-54% of the Federal budget for military spending (around $600 billion a year) and redirect some of that to revamp the Social Security system. We need to pay for it somehow and it is very reasonable to cut some military expenditure. Getting that through Congress is a whole different issue though….

  • “Returns to the economy” is poorly specified: are you speaking of supply or of demand? Some of the above is one, some the other, all mixed together. Retirement means that the supply part changes; on day one, consumption does not (since monthly income will have been anticipated, and habits adjusted in advance).

    Furthermore, money is fungible. If the focus is demand, then does it matter whether the $2000 a doctor gets paid is with a check from Medicare, or a check from a private insurance company, or a check from your grandparents? All three would enter into GDP equally, even if where they are in C+I+G+X-M varies – the total is the same whether it’s C or G.

  • cohend17

    One thing that crosses my mind is the interaction between life-expectancy and the economy. Despite the fact that future generations may not be as large as the baby boomer generation, might longer lifespans mean expenditure for more years than current retirees? It is possible that the longer one lives, the longer he/she will have to pay for healthcare, not to mention other consumption as well. Could this benefit the economy?

    • That depends on healthy aging and pushing to keep people in the labor force. You can readily [≠ quickly, lots of pieces but all straightforward] build a spreadsheet simulation to see whether this matters. Lots of people still have jobs that entail walking all day; knees and backs give out, so attempts to raise the retirement age are partially offset by a rise in disability claims. My hunch is that it helps, but only a little – in part because I don’t see healthcare being brought under control. So you live to 90 not 80, retire at 75 not 65, but if you are still bedridden for the last 5 years…there is a net gain, because the extra years of labor are up front. But if we put it all into the above spreadsheet, even that is diminished because we won’t get extra years of work out of those already retired.

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