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Consumer Spending During Retirement

According to projections by the Census Bureau, the U.S. population aged 65 years and older will more than double over the next three decades, totaling roughly 69 million in 2030. With this demographic phenomenon comes an increasing concern in both the public and private sectors for the welfare of the elderly. Whether the topic is Social Security sustainability or rising health care costs, the fundamental factor in any issue regarding the older population is retirement, because preparation for this event determines the lifestyle and standard of living during this stage of the life cycle. This report provides information on retirement and pre-retirement spending patterns, using data from the Consumer Expenditure Survey. Two comparisons are made: 1) spending by retirees in 1987 and 1997, and 2) pre-retirement and retirement spending in 1997.

A consumer unit¹ is classified in the retired group if the reference person is 65 years of age or older and retired, and there are no earners in the household. To show how spending patterns change with retirement, a pre-retired group is selected based on the following criteria: The age of the reference person is between 55 and 64, and he or she is earning labor income, which includes both wage and salary income and self-employment income. The data presented for both groups are taken from the interview portion of the Consumer Expenditure Survey for the periods 1987 and 1997. The Interview Survey collects data on major items of expense, household characteristics, and income. Each sample household is interviewed once per quarter for five consecutive quarters. These data capture up to 95 percent of all expenditures.

Spending by retired households, 1987 and 1997. As the table indicates, the allocation of total dollars spent by retired households in 1997 is very similar to that in 1987. For this study, each year from 1987 through 1997 was examined; but, because there is so little variation in the intervening years, only data for the first and last year are shown. Similarly, survey results show that the household characteristics of those in retirement have remained relatively stable over the past decade. Only the residential status has shifted significantly, with an increase of 4.5 percentage points in the proportion of retirees who own their homes. More specifically, the percentage of retired households who are homeowners without a mortgage has grown from 61.7 percent to 65.4 percent, while the percentage of renters has declined from 29.0 percent to 24.5 percent. (The share of homeowners with a mortgage showed little change—from 9.3 to 10.1 percent.)

Despite this change in housing tenure, the share of total expenditures devoted to housing has changed very little, accounting for the largest share (approximately one-third) of total spending in both 1987 and 1997. Health care as a share of total expenditures has changed the most among the major categories reported in the table, increasing by 1.5 percentage points over this period. Although this is a rather small change in itself, there has been a significant shift in the allocation of total health care dollars, with medical insurance accounting for 55.4 percent of health care expenditures in 1997, up from 43.8 percent in 1987.

Pre-retired vs. retired expenditure shares, 1997. Based on the aforementioned selection criteria for these two groups, there are obvious differences in terms of household characteristics. For example, the average age of the reference person in the pre-retired sample is 59 years, compared to 76 years for retirees. Also, by definition the retired group is made up of no-earner households, whereas the average number of earners in a pre-retired household is 1.8. There are other noteworthy differences between the two groups that are not direct results of the selection process. For example, the average family size for a retired consumer unit is 1.5 persons versus 2.3 persons for the pre-retired and, on average, retirees own fewer vehicles (1.3 versus 2.3).

Residential status and income also differ. While a higher proportion of pre-retired households own their homes—80.7 percent, versus 75.5 percent of retirees—only 14.4 percent of retired homeowners have a mortgage, while 55.6 percent of pre-retired homeowners still report payments on their house. As one might expect, there is a substantial decline in household income after retirement.² Average income for a pre-retired consumer unit is more than two and a half times that for retirees—$49,330 versus $18,206.

[image: Bar chart showing Shares of Total Expenditures Allocated to Selected Components, Consumer Expendiure Survey, 1997 divided into pre-retirement and retirement spending.]

As the bar graph illustrates, retired consumer units allocate their spending dollars differently than those households that are approaching retirement. Not surprisingly, the biggest difference is in the shares of total expenditures devoted to personal insurance and pensions (abbreviated as pensions in the graph). While this is a significant spending category for the pre-retired group, at 12.3 percent of total spending, the comparable share is only 1.6 percent for retirees. On the other hand, during retirement, health care commands a much larger percentage of total expenditures than the pre-retirement share, 13.3 percent versus 5.4 percent. Furthermore, this difference is accompanied by a shift in the allocation of total health care dollars among components, with health insurance accounting for 47.9 percent of health care spending before retirement and 55.4 percent afterward. Similarly, while the expenditure share for total food differs by only 2.5 percentage points upon retirement, the proportion of those food dollars spent for food at home varies by almost 3 times that much, from 70.9 percent in pre-retired consumer units to 78.1 percent in retired households. Another major expenditure category for which the two groups' shares differ significantly is transportation. The pre-retired group spends 19.0 percent of their total expenditures for transportation, whereas retirees allocate 15.1 percent to this category. This difference can be at least partially linked to the fact that retirees are no longer commuting to work, as well as to the fact that the pre-retired consumer units, on average, own more vehicles than the retired consumer units. Housing, at 30.0 percent of total expenditures, is the largest expenditure share category for the pre-retired group. As noted previously, this is also true for retired households, who devote 33.0 percent of their total spending dollars to housing. The remaining categories of expenditure shares differ only slightly between the two groups, with retirees allocating less to apparel (2.9 percent versus 4.2 percent) and entertainment (4.7 percent versus 5.1 percent) than the pre-retired consumer units.

For more information about the data presented here, contact Abby Duly in the Division of Consumer Expenditure Surveys, Bureau of Labor Statistics by e-mail at duly_a@bls.gov or by phone at (202) 691-5135.

¹ A consumer unit is defined as members of a household related by blood, marriage, adoption, or other legal arrangement; a single person living alone or sharing a household with others but who is financially independent; or two or more persons living together who share responsibility for at least 2 out of 3 major types of expenses—food, housing, and other expenses. For the purpose of this analysis, consumer unit and household are used interchangeably.

² Income measurements for this study are of pre-tax household income from complete income reporters only. A complete income reporter is a consumer unit that provides values for at least one of the major sources of its income, such as wages and salaries, self-employment income, and Social Security income. A complete reporter may not provide a full accounting of all income from all sources, however.

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