Average provides a useful benchmark
by Sudipto Banerjee, Ph.D., Employee Benefit Research Institute
Retirement saving involves a lot of unknowns, the most important being not knowing how much money will be needed in retirement. Although it is impossible to predict the retirement expenses of any particular household, the average amounts spent by current retirees can serve as important benchmarks for individual savers as well as for industry experts and policymakers.
Read the complete study, including graphs and charts, here (PDF).
This article examines the expenditure pattern of the older segment of the U.S. population. The majority of the households studied here have either reached retirement age or are on the cusp of retirement. The data come from the Health and Retirement Study (HRS) and the Consumption and Activities Mail Survey (CAMS), which is a supplement of the HRS (described below). CAMS contains detailed spending information on 26 nondurable and six durable categories, and it follows the same group of people over time. Using this information coupled with the income information available in the HRS, this study summarizes the consumption behavior of the American elderly. The primary goal is to examine how overall spending and spending in different categories change with age.
Two data sources are used for this study. First is the HRS, which is a study of a nationally representative sample of U.S. households with individuals over age 50. It is the most comprehensive survey of older Americans in the nation and covers topics such as health, assets, income, and labor-force status in detail. It is a biennial, longitudinal survey with questionnaire waves in even-numbered years beginning in 1992. The initial sample consisted of individuals born between 1931‒1941 and their spouses, regardless of their birth year. Younger cohorts have been added in following years. The study is sponsored by the National Institute on Aging (NIA) and the Social Security Administration (SSA)
and administered by the Institute for Social Research (ISR) at the University of Michigan.
The second source of data used in this study comes from CAMS, which was started in 2001 as a supplement to the HRS. From the participants in the 2000 HRS, 5,000 households were selected at random and mailed the CAMS questionnaire. In couple households, the questionnaire was sent randomly to one of the two spouses. Since 2001, CAMS has been conducted every two years, with 2011 being the latest round of available data. It collects spending information on 32 categories (six durable and 26 non-durable categories).
Figure 1 shows how overall reported spending in CAMS households with at least one member above age 65 in 2011 compares with those reported in the Consumer Expenditure Survey (CEX), which is the benchmark survey on household expenditure in the United States. For households with at least one member between ages 65 and 74, CAMS reports a slightly lower ($41,322) mean household expenditure than CEX ($44,646). But for those ages 75 and above, there is not much difference in mean household expenditure between CAMS ($33,028) and CEX ($32,688). The household-income data are taken from the RAND version of HRS data because it provides a consistent measure of income across all waves.1
Household Income and Expenditure Across Ages
Figure 2 takes a closer look at the expenditure pattern across ages, both by breaking total household expenditure into different categories and also by separating it into different age groups. The mean, median (in 2013 dollars) and percentage share of each category in total spending are reported. The different expenditure categories are described above.
Some immediate patterns emerge from Figure 2. First, as in previous studies (Banerjee, 2012; Butrica, Goldwyn, and Johnson, 2005; Butrica and Mermin, 2006), it is found that home and home-related expenses is the largest spending category for every age group. In any given year, the percentage of total expenditures for home-related items was very close for every age group. Second, health expenses increase steadily with age. In 2011, households with at least one member between ages 50 and 64 spent 8 percent of their total budget on health items, while those ages 85 or over spent 19 percent of their budget on health items. Health-related expenses occupy the second-largest share of
total expenditure for those over age 75. For some, health care expenses can be heavily skewed toward the end of life (DeNardi et. al., 2010). To that extent, the difference between mean and median health care expenses for the oldest age group (85 and above) is important. For example, in 2011, while the median health care expenditure for this group was $2,814, the mean was much higher at $6,603.
The two components of household expenditures that show a declining pattern across age groups are transportation expenses and entertainment expenses. As a share of total expenses, transportation expenses fall the most. For example, in 2011, they constituted 16 percent of total expenses for households with at least one member between ages 50 and 64, as opposed to 7 percent for those ages 85 and above. With retirement, daily transportation needs (such as commuting to work) decrease, and with increasing age and declining health, people become more restricted to the indoors, which cuts entertainment expenses as well. Food and clothing expenses (as a share of total expenditure) remain more or less flat across the different age groups.
Change in Household Expenditure for a Fixed Group of Households
Although Figure 2 shows detailed household spending across several years, Figure 3 is more helpful in understanding how household spending changed in recent years as the household’s members aged, because Figure 3 tracks the spending of a fixed set of households over time. Starting with 2005, it shows how total spending as well as spending in different categories have changed as people aged through 2011.
Average household spending dropped between 2005 and 2011 in every age group, and younger households cut back spending more than older households during that period. For example, households between ages 50‒59 in 2005, most of whom were presumably still in the labor force but on the cusp of retirement, reported the highest drop. Their average household spending dropped from $53,284 in 2005 to $45,234 in 2011 (in 2013 $s), a real decrease of 15 percent. In terms of specific categories, their average spending on clothing dropped 36 percent, followed by other spending at 25 percent.
Whether this was a short-run drop in response to the 2008 market crash or part of a long-run trend remains to be seen. Households between ages 60 and 64 and those between ages 65 and 74 both reported a 10 percent drop in average household spending. For both of these two groups, the highest drops came in transportation and clothing expenses. A large part of these expenses are related to work, and with many households in these age groups moving into retirement during the time frame these changes are not surprising. For the oldest group, 75 and above, there was a 5 percent drop in overall spending but a 6 percent increase in health-care expenses.
This section takes a detailed look at different components of household spending and how they change with age. Combining data from 2003 to 2009, Figure 4 shows how mean household income and expenditures change with age. Income falls much faster than expenditures for older age groups. Taking age 65 (i.e., households that have at least one member age 65) as the benchmark, average household income is 20 percent less by age 75 and 50 percent less by age 85. In comparison, average household expenditures, again measured against the age-65 benchmark, are 16 percent lower by age 75 and 40 percent lower by age 85. It should be noted here that the income and consumption paths do not show the same group of households at different ages (this is a cross-sectional trend).