Housing Expenses Drive Spending Volatility in Retirement

While data show that overall spending tends to decrease for people in retirement, as many fear outliving their savings, the path of decline can be choppy, as nondiscretionary spending tends to get in the way, a new T. Rowe Price study found.  

For households with less than $150,000 in annual income, spending volatility is largely driven by unplanned expenses that might require immediate cash. T. Rowe Price found that home-related expenses were the largest contributor to spending volatility during retirement and were five times more likely to drive spending volatility than were health-related expenses.  

Home-related expenses—anything from mortgage, rent, utilities and homeowners’ insurance to home repairs and maintenance—accounted for 25.1% of the variance in spending, while health care expenses accounted for 5.1%. 

From 2016 through 2020, Americans aged 65 and older spent an average of $16,880 annually, or $1,406.68 per month, on housing-related costs, according to a recent SoFi report. These expenses, however, varied significantly by location and housing type. 

In general, T. Rowe’s research found that half of retirees experienced a spending increase of up to 25% between the ages of 65 and 90. Further, more than one-quarter of households experienced a 25% to 50% spending increase during retirement.  

“Given the range of possible variations in spending increases, the amount of liquid assets retirees should hold in their portfolios to address any potential shortfall will vary,” the T. Rowe report stated. “Generally it will depend on personal factors such as income, expected expenses, health status, family situation, risk preference, etc.” 

Managing spending volatility is a two-pronged issue, the firm’s report explained. On one hand, it is important to mitigate the effects of volatility arising from nondiscretionary spending. But on the other hand, it is also crucial to aim to generate higher income and higher investment returns, which can help boost available capital. Discretionary spending includes planned expenses, such as a long-planned trip, making a dream purchase or donating to charity.  

Sudipto Banerjee, author of the report and vice president of retirement thought leadership at T. Rowe, argued that if retirees have insufficient liquid assets to cover nondiscretionary spending, they may be forced to take untimely distributions from their longer-term investment portfolios, which could lower their chances of enjoying a successful retirement. 

Banerjee suggested that plan sponsors and plan advisers should provide solutions that address liquidity and growth. Sufficient allocations to liquid assets can help alleviate financial stress during periods of heightened spending, according to the report. 

Given the high probability of fluctuating expenses, Banerjee wrote that a “one-dimensional goal” of systematic withdrawals may not be enough for most retirees. He argued that plan sponsors need to provide strategies for both income generation and spending-risk mitigation in retirement. 

The sample used in T. Rowe’s study tracked 1,306 retired households over the 14-year span between 2005 and 2019.