According to May research from the Employee Benefit Research Institute, spending by older Americans is outstripping income. By the EBRI’s estimate, 40% of older individuals are spending more than they make.

In a May 2019 report, “Spending Patterns of Older Households,” the institute’s Zahra Ebrahimi said the EBRI had made a few surprising findings while analyzing previous studies and looking at the gap between total spending and income, finding 41% of retirees spent more than income in 2015.

For single and retired individuals, the average spending was $5,000 lower than income, but the median spending outstripped median income by $3,000. Retired married couples spent only 80% of their income in 2015, and those households where one of the spouses was still working spent only 45% of income.

The researchers said data supported previous findings that housing and transportation expenses start to fall in retirement while food and health expenses rise among those leaving the workforce.

The study also found that 71% of households with surpluses had IRAs or pensions, whereas only 52% of households with deficits had those vehicles.

The availability of a pension or annuity also affected clients’ spending patterns: Only 34% of households with pensions or annuities spent more than their income, while 46% of households without those items spent more than their income in 2015.

Jim Holtzman, an advisor with Pittsburgh-based Legend Financial Advisors, says, “What we tell our clients is that whatever you’re spending today, whatever that total amounts to, meaning pre-retirement, assume that you’re going to continue [spending] that same dollar amount [in retirement]. The categories might change. But don’t think you’re going to be cutting your expenses in retirement.” You’re going to have more time to spend money, he says.

What happens to spending is not so much that the amounts decline but that the categories simply shift around a bit, he says. Vacation spending and eating expenses will likely go up. “Unless you’re downsizing the home, your utilities aren’t going to go down; they can even arguably go up because you’re home more.” Another key item is health-care expenses, which creep up. Holtzman says neither pre-retirees nor retirees think about the cost of health insurance from a premium aspect—they “totally don’t understand what the cost of Medicare really is. And they don’t know the routes you can go to get health insurance coverage—meaning going the Medicare route or the Medicare Advantage route. So that’s an incredible eye-opener for most clients.”

The Medicare route, he says, is with plans A, B, D and Medigap; the Medicare Advantage plan rolls all that into one plan. These plans need to be compared. Hospital inpatient care for Part A should not cost a premium if clients were paying in during their working days. (Buying the plans currently costs $437 a month.) Medicare B premiums start at $135 a month, but are adjusted upward according to your income: If you have higher income, say from required minimum distributions from an IRA, you’re going to have a higher premium. “So in certain client situations that are in that range, that’s an eye-opener,” Holtzman says, “because if their income is still really high in retirement, they might pay triple the cost for Medicare.” The top Medigap plan could push $300 a month, Holtzman says. Making those cost assumptions early is important. Medicare Advantage plans, meanwhile, are private and their premiums vary by location.

Clients’ worries that they are making bad assumptions, added to their worries about a possible recession, have made them anxious, says Holtzman.

Social Security is another issue, he says. If you take it along with IRA distributions, you can push yourself into higher tax brackets and pay higher effective tax rates. While the conventional wisdom suggests it’s better to take Social Security later, perhaps at age 70, it depends on the client.

Your health and life expectancy play a part in this, he says. “If you have some health issues, taking [Social Security] early is going to make more sense,” he says, even if it means you give up the 8% benefit increase by waiting from your full retirement to age 70 to take the benefit. However, it’s more complicated for married couples, because then you must think about the survivor benefit. If the unhealthy spouse earns more, “in that example it could make sense for even the unhealthy spouse to wait to age 70 because you’re going to have Social Security paying out over two lives.”

Forrest Baumhover, a CFP with Lawrence Financial Planning in Tampa, Fla., says, “When we run retirement plan projections, we assume [in Florida] that the last three years of someone’s life will be spent with some sort of long-term-care need, whether it’s in a facility, whether they hire someone to do long-term care.” The baseline assumption is $60,000 a year for that care in today’s dollars compounded at 5% interest. The number seems extreme for someone 30 years out from retirement, but the firm uses it to show clients how they will spend exponentially more in the last three years than they will in even the first 10 years of retirement just doing things on their bucket list.

Not A Budget, An Education

The amount they choose to spend has been coordinated so that they can spend that money yet still make assumptions for that longer-term need, Baumhover says. That’s why he looks askance at things like the early-retirement FIRE movement. “The FIRE movement hasn’t matured to the point that they are talking about things like long-term care,” Baumhover says. “Saving 40% of your income doesn’t work when you’re retired to spend outsized amounts of money on things that you have no idea about in your 40s.”

Education is important for his clients. “I hesitate to say the word ‘budget’ because we don’t budget for people. But we do identify that big elephant down the road so that when we go back from that, we can help them manage their cash flow more effectively.”

The EBRI compiled its data from the Health and Retirement Study (HRS) 2014 and the Consumption and Activities Mail Survey (CAMS) 2015.