What do older Americans spend their money on? Will they have enough?

A new study from the Employee Benefit Research Institute:

"Expenditure Patterns of Older Americans, 2001-2009" EBRI Issue Brief, No. 368, February 2012

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI) Email: banerjee@ebri.org

This paper examines the consumption pattern of the older section 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. CAMS contains detailed spending information on 26 nondurable and six durable categories, and it follows the same group of people over eight years.

Using this information coupled with the income, wealth, health, and labor-market information available in the HRS, this study attempts to summarize the consumption behavior of the American elderly. It has three primary objectives: (1) To examine how consumption patterns evolve with age, income, and other demographic characteristics; (2) To study the income, expenditures, and wealth-holding patterns of the elderly to get a sense of how they are managing their finances and if they are at risk of outliving their assets; (3) To determine if long-term care (LTC) insurance and private health insurance affect the elderly’s consumption behavior.

Household expenses steadily decline with age. With the age 65 expenditure as a benchmark, household expenditure falls by 19 percent by age 75, 34 percent by age 85, and 52 percent by age 95. Home and home-related expenses remain the single largest spending category for older Americans. On average, those over age 50 spend around 40-45 percent of their budget on home and home-related items.

Health-related expenses are the second-largest component in the budget of older Americans. It is the only component which steadily increases with age. Health care expenses capture around 10 percent of the budget for those between 50-64, but increase to about 20 percent for those age 85 and over.

The results show that while high-income households are managing their income and expenses well in retirement, low-income households are struggling. The high-income households maintain high levels of wealth, but whether these wealth levels will be sufficient to support them through very advanced ages or in case of catastrophic expenditure shocks is beyond the scope of this study. But for low-income households that are already struggling, such events will only make matters worse.

There are several key demographic groups that are also not doing well in retirement, and they may be at risk of running short of wealth at some point in retirement. Demographic groups such as singles, blacks, and high school dropouts are outspending their resources in retirement. Not surprisingly, the lowest-income group (bottom-income quartile) which is generally overwhelmingly represented by the above groups, appears to be struggling the most. Long-term care and some form of private health insurance coverage have a significant effect on increased spending by older households.