Data and Research October 16, 2017

A Formal Plan Can Help With Unexpected Retirement Expenses

More than one-quarter of retirees said basic living expenses in retirement were higher than they expected, a study found.

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Twenty-six percent of retirees said their basic living expenses in retirement were higher than they expected prior to retiring, according to a study by LIMRA Secure Retirement Institute. 

Another four in 10 retirees underestimated health care and long-term care costs. On average, two-thirds of retirees’ expenditures are spent on basic living expenses and health care and long-term care costs.

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“Mismatches between spending expectations and experiences are strongly associated with retirees’ confidence levels,” says Matthew Drinkwater, PhD., assistant vice president, LIMRA Secure Retirement Institute.

Six in 10 retirees who said their basic living expenses were significantly higher than they expected did not feel confident they would be able to live their desired retirement lifestyle. For those who encountered significantly higher than expected health care and long-term care costs, nearly one-third (32%) said they were not confident they would be able to live their desired retirement lifestyle.

The study found women are 50% more likely than men to say that their basic living expenses are somewhat or significantly higher than they expected before they retired. (30% versus 20%, respectively).  Women are also slightly more likely to experience higher than expected health and long-term care-related expenses than men are (43% vs. 39%). Among retirees who faced unexpectedly higher basic living costs, women express lower levels of confidence that their savings and investments won’t run out if they live to be 90 (36% of women vs. 49% of men).

Cutting Back on Discretionary Spending Not the Answer

Lower-income retirees are substantially more likely than higher-income retirees to say that their basic living expenses are higher than anticipated. Among retirees with incomes between $35,000 and $49,999, 35% say these expenses exceeded their expectations prior to retirement. When you consider that retirees with household incomes of $35,000 to $49,999 spend almost 60% of their income on basic living expenses, the added unexpected costs could substantially affect their retirement confidence, LIMRA says. Retirees with incomes of $100,000 or more spend about 45% of their income on basic living expenses, and only 15% claim that expenses are higher than they thought they would be.

“Many retirees say they would cut back on discretionary expenses to compensate for larger than expected basic living expenses and/or health and long-term care costs,” notes Drinkwater. “This is not necessarily a practical solution. Generally speaking, our study found discretionary spending represents less than 20% of total expenses for retirees. And those facing these unexpected higher expenses already spend very little on discretionary items.”

Institute research indicates consumers who conduct retirement planning activities or have a formal written retirement plan prior to retirement have a greater likelihood that actual expenses resemble anticipated expenses. Sixty-nine percent of those with a formal written plan say discretionary expenses are about the same as expected versus 51% of retirees without any plan.

To view an infographic highlighting the findings, please visit Experience Versus Expectations in Retirement Spending.

 

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