Three ways to manage spending volatility as clients transition into retirement
Assumptions about how spending changes in the years just before and after retirement are a crucial part of retirement planning. New research, drawing on proprietary Chase data, gives us insights into real-world spending behaviors during the retirement transition years.1 Our analysis has found that for a majority of retirees, spending became volatile as they adjusted to this new phase of life—and that volatility may have serious financial implications through their retirement years.
Below we share highlights of our findings—and three ways for advisors to help their clients build stronger retirement portfolios.
Key finding: Volatile spending as households adjust to a new phase in life
We found that median spending gradually increased prior to retirement and tapered off in the early retirement years. This led us to the question: Were the same households that spent more before retirement also spending more after retirement? To find out, we designated the year before retirement as the benchmark year and then compared the benchmark with each of the three years following retirement. We also defined a significant variation in spending to be 20% more or less than the benchmark year.
Exhibit 1: Spending volatility
In each of the three years after retirement, spending increases or decreases by more than 20% compared with the year before retirement
OUR DATA ANALYSIS AT A GLANCE
We started with 31 million households. By looking at changes in the mix of labor and retirement income, we determined who had likely retired during the study period, October 2012 to December 2016.
We then narrowed our focus to only those who had retired and appeared to do most of their spending via Chase. This left us with a robust data set of nearly 60,000 households for our analysis.
The most common retirement ages were 60 to 69, with a median age of 64.
We also saw that people who retired before age 60 were more likely to have a pension.