Are retirees spending more than they can afford?

Results from the Employee Benefits Research Institute (EBRI) 2022 Retirement Spending Survey finds that many retirees report that their expenses are higher than expected.

Assessing changes in retirement spending habits and well-being since 2020, EBRI’s survey of nearly 2,000 U.S. retirees between the ages of 62 and 75 finds retirees were more likely to report that their expenses are “much higher” or “a little higher”. ” that they cannot afford in 2022 – at 27% in 2022 compared to 17% in 2020.

Among those who have cut back on essential or discretionary spending since the pandemic, the most common reason cited by about 9 in 10 retirees was fear of inflation.

“Inflation appears to be a major driver of the mismatch between expectations and reality, a double-edged sword that undoubtedly increases actual spending but also reduces spending, probably out of a desire to protect future purchasing power,” notes Bridget Bearden, of research and development. strategist at EBRI.

To that end, almost half of retirees (48%) reported spending less than $2,000 per month, while a third (33%) reported spending between $2,000 and $3,999 per month. EBRI observes that this marks an increase from 2020, when 42% of retirees spent less than $2,000 per month and 37% spent between $2,000 and $3,999. Black and Hispanic retirees were almost twice as likely (28% and 26%, respectively) to report that their monthly expenses were less than $1,000 compared to the overall sample (15%).

Overall, more than half (55%) retired earlier than expected, while 40% said they retired around the time expected and 4% later than expected. Black retirees (62%), those with 2021 household income below $30,000 (69%), and those with poor self-reported health (78%) were more likely to report having retired earlier than expected compared to their non-black, higher-income, healthier counterparts. The most common reasons for retirement were the ability to retire affordably (29%) and having a health condition or disability unrelated to COVID-19 (21%) .

Meanwhile, although more than half of retirees said their spending across a range of categories was in line with what they expected before retirement, many reported spending higher than expected. About 26% of retirees said they were spending more than expected on housing costs and health and medical insurance. Additionally, 20% of retirees said they were spending more than expected on medical expenses.

Sources of income

As in 2020, 7 in 10 people say Social Security is a major source of their income. The EBRI finds that annual household income was positively related to reliance on social security as the main source of income; 82% of retirees with an annual household income of less than $30,000 said Social Security is a major source of income, compared to 45% of retirees with an annual household income of more than $100,000.

When it comes to workplace defined benefit plans, fewer retirees said a DB or traditional pension plan was a major source of income (35%) in 2022, compared to 2020 (41%). As expected, married retirees and those with higher annual incomes were more likely to report DB plans as an important source of retirement income. As for defined contribution plans, 36% said they were a “major or minor” source of income, while more than half (64%) said they were not a source of retirement income. .

It is perhaps unsurprising that those dissatisfied with retirement and those with poor self-reported health (a score of 1, 2 or 3 on a scale of 1 to 10) are more likely to rely on social security as the main source of income. income (85% and 83%, respectively).

Some of the segments of retirees who shared lower living standards, low alignment with expectations and low retirement satisfaction included those:

• without a DB plan or other annuity income;
• with low financial knowledge;
• who do not use an adviser;
• who are not married; and
• who are retired women.

Meanwhile, just 3% overall said they intended to convert any current source of income into a guaranteed income stream, while 55% said they did not. intent and 15% were unsure. Hispanic retirees were more likely to say they planned to move to a 7% guaranteed income stream.

In contrast, segments of retirees who shared more positive perceptions of retirement life based on standard of living, alignment, and satisfaction included those with DB or other annuity income, those with financial resources, those using an advisor and married retirees.

The survey was carried out during the summer of 2022.