For many retirees, unexpected housing expenses have a much greater negative impact on retirement income than unexpected healthcare costs, according to T. Rowe Price.

The research looked at what unexpected spending increases occurred in retirement and divided the increases into discretionary spending increases—which can be desirable, like taking a dream trip—and nondiscretionary increases—such as needing a new roof on a residence or healthcare costs.

The data found that retirees with annual incomes of less than $150,000 predominantly had spending volatility due to nondiscretionary issues, while retirees with more than $150,000 in income experienced volatility from discretionary increases, which they could ultimately accommodate or control.

For those under-$150,000 retirees, by far the most impactful expense was not healthcare expenses, which everyone fears. Unplanned housing expenses accounted for more than 25.1% of the variance in spending, while healthcare accounted for only 5.3%.

“Although health‐related costs are typically the top concern when it comes to retirement expenses, data show that housing is both the largest contributor to spending volatility and, by far, the largest spending category before and throughout retirement,” wrote Sudipto Banerjee, vice president and an economist and researcher of retirement trends.

“Advisors can help retirees mitigate spending volatility in this category by suggesting strategies that minimize unexpected home expenses in retirement, including completing extensive repairs before retirement or right‐sizing to a newer home,” he continued.

This study analyzed data from the Institute for Social Research at the University of Michigan and tracked a nationally representative set of 1,306 retired households over the 14 years between 2005 and 2019.

The research confirmed that, over the course of a retirement, retiree spending declines by roughly 2% a year. But the path of the decline is full of far more ups and downs than conventional wisdom suggests, according to the firm’s latest insight paper, “Planning for Spending Volatility in Retirement.”

While many retirees expect their spending will decline over the years, the reality is that income strategies must be able to accommodate large unexpected fluctuations in expenses—as much as 100% and sometimes lasting four years or more, according to the research.

“While average spending increased as investable assets increased, the average change in household spending (measured in absolute value) did not fluctuate based on investable assets,” Banerjee wrote. “This means that retirees with any level of investable assets or income can face a high level of spending volatility, and they need to plan and prepare accordingly.”

The research found that half of retirees experienced an unexpected spending increase of up to 25% on top of their planned budget, a little over a quarter experienced an increase between 25% and 50%, and the remainder experienced an increase between 50% and 100%.

In addition, the increases weren’t necessarily quick to retract. Some 15% of the retirees who experienced increases were still living with that increase after four years.

“If substantially increased spending levels persist, retirees may need to reevaluate their investment portfolio and adjust their withdrawal strategy,” Banerjee wrote. “For example, if members of a retired household annuitize part of their assets to cover ongoing expenses and invest the rest in long‐term securities, they might need to liquidate those securities prematurely if a spending increase persists.”

In terms of how well aligned retiree’s income streams were with the pressures of unplanned expenses, the research found that non-guaranteed retirement income products that could accommodate the volatility would be satisfactory in most retiree situations. However, in order for that to happen, retirees have to be ready for liquidity events when they happen.

And that’s where the industry might be falling short, the paper said.

“In recent years, discussions about how to generate a steady cash flow from retirement savings have taken center stage, but in our view, not enough attention has been paid to the liquidity problem,” Banerjee wrote. “While replacing the income from employment is the primary goal, the other objectives—maintaining liquidity and growing assets—do not disappear. Accordingly, the retirement industry should pay attention to these objectives as they transition retirees from the accumulation phase of retirement to a successful drawdown phase.”