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How Does Spending Change In Retirement? 7 Things To Expect


One of the biggest questions for people who are transitioning from full-time employment is ‘how does spending change in retirement?’. It is a difficult question to answer, but there is a lot of research out there, which points to some key takeaways.

Key Takeaways

  • Retirees can expect to spend less on food and clothing
  • You can expect to spend less on transportation in retirement
  • Expect healthcare costs to increase
  • Many retirees plan to spend more on gifting
  • More favourable tax rules apply to retirees
  • Expect your overall spending to remain broadly in line with current spending

Irish Research

A 2020 study carried out by the Economic and Social Research Institute (ESRI) in Ireland used the Household Budget data to analyse spending pre and post retirement across households here. They found that overall spending declines in retirement by 13% for two-adult households where the other (non-retiring) adult is not working.

Where both adults are retiring from working, they found there is no significant change in spending. Interestingly, spending for single retirees declines by as much as 30%! This is due to lower spending on meals outside the home, leisure and holidays.

Several areas are most affected when it comes to retirement spending.

1. Food and Clothing Cost In Retirement

Food is one of the biggest areas of spending that is affected by retirement. While groceries and food consumed in the home did not see a change in spending, retirees spend less on eating out.

Likely due to the less frequent coffee stops and purchasing lunch during the working day. Spending on clothes also tends to go down in retirement, as there is no longer a need to purchase work outfits.

However, one note to think about for at home food costs is that it is possible that this will reduce as in many cases children will be grown and no longer need parental support.

2. Retirees Spend Less on Transportation

With the need to drive or take public transport to and from work, many retirees find that they spend less on transportation. Fewer hours spent travelling to and from the daily grind, means less spent on fuel.

It also means less wear and tear on your car, which hopefully results in less maintenance costs! If you were used to replacing your car every 3 or 4 years, you might consider not doing that anymore, particularly if you are only putting a few thousand miles on the clock each year!

I know some folks who, despite doing lots of adventures and exploring, have only put 20,000 miles on their car in the past 4 years – the car is like new, and no benefit to them in spending thirty thousand euro upgrading it. Especially in the current car price environment!

3. Retirement Travel Plans

It is common for retirees to list travelling as one of the biggest goals to achieve. With retirement comes much more free time to explore the world and visit all those places on your bucket list.

If traveling is one of your priorities, expect spending to increase obviously. You will have the time to take more, and longer holidays.

One way to not lose out on these amazing experiences but still minimize costs is to travel during off-peak periods. These times also have the advantage of smaller crowds at holiday hot spots or attractions! They used always be on the back page of the Irish Times, but now there is a plethora of websites offering discounted travel trips for the more ‘mature’ traveller!

4. Gifting In Retirement

When considering ‘how does spending change in retirement’ don’t overlook gifting. Many retirees expect to see an increase in retirement gifting. There are several reasons why this might happen.

You might see the arrival of grandchildren, who you will want to gift on birthdays and Christmas. Depending on your budget and planning approach, you might decide to contribute to an education fund for your younger family members. Others, if they have the means, may increase charitable donations.

Of course, it might also be prudent to include gifting to adult children (Blog 201) in your financial planning to ensure you maximise your tax efficiency. Many retirees who have the means to do so, will try to maximise the Small Gift Exemption and gift €3k to each loved-one per year, from each retired adult.

5. Retirement Taxes

Retirees can expect to see a lower tax burden. Once you reach the age of 66, you will no longer need to make PRSI contributions. You can also take a tax-free lump sum from your pension up to €200,000, depending on the size of your pot.

You can also take an additional €300,000 as part of your lump sum with a favourable tax rate of 20%.  Additionally, when you start to draw your pension, income tax changes. Most people will only pay tax at 20%.

Understanding pension tax is important and must be part of your financial plan. Your gross income might reduce, but the lower tax rate can have a significant impact on how much cash reaches your pocket each month.

If your income drops, your total effective tax rate will drop – often quite significantly. The average total effective rate of tax we see tends to be in the 15 to 18% rate, down often from the 40 to 50% range pre-retirement. That reduction means you pocket a far bigger slice of any income you generate from pensions or other assets post-retirement.

6. Housing Costs In Retirement

What you spend on housing is likely to decrease in retirement. Your mortgage is likely to be paid off or nearly so. Many retirees also try to downsize when they no longer need a larger home with children grown.

This can also reduce housing costs, particularly if moving from a home that required a lot of maintenance. One study in the US found that housing spending dropped from over $23k per year for those under 55, to just over $15k per year for those over 75.

7. Final Thoughts On How Does Spending Change In Retirement – In My Own Experience

We all recognise that everyone’s retirement spending will be different depending on your budget, means and plans. The topics discussed here are the main areas where most of us can expect to see changes, whether it is an increase or decrease.

In my own experience, the rate at which you will spend and gift in retirement will be governed by how much you can afford to spend and gift!

In developing your financial plan, we first determine what you would LIKE to spend and gift. We then assess whether you can AFFORD to do so over the long term, based on prudent growth, inflation and tax assumptions.

By the very nature of things, some of us will be able to afford what we want, and others won’t. For some of us, we can afford to spend and gift to the levels we want to. For some of us, we can only afford to spend and gift what we need to.

In situations of the latter type – we are forced to prioritise what is most important to us, and ensure we have a plan in place to cover those essentials first and foremost.

Now for the beauty of on-going financial planning. We revisit your cashflow planning on an annual basis. In so doing, when growth/tax/rules change, we may spot additional scope for spending or gifting.

In that scenario, one may be able to afford not only the ‘needs’ but perhaps also some of the ‘wants’ – and so spending and gifting may increase, but it was through choice and ability!

I hope this helps,

Paddy Delaney RPA APA QFA


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