Health Care, Housing Eat Into Retiree Budgets
by Kevin Murphy, United Investment Services, LPL Financial Advisor
The Employee Benefit Research Institute (EBRI) recently examined the expenditures of retirees, and this insight may be helpful for pre-retirees who are planning for their later years. It may come as little surprise that housing expenses consumed a significant portion of retiree budgets, and health care expenses increased with age.
When EBRI compared expenses for those between the ages of 50 and 64 with those aged 85 and older, the percentage of income attributed to health care doubled even though total spending declined significantly.1 For example, total spending declined from $46,213 for households with individuals between the ages of 50 and 64 to $25,765 for households with individuals aged 85 and older. Housing was the largest expenditure for both groups, declining from 47% of spending for the younger group to 43% of spending for the older group. The percentage of expenditures for health care increased from 9% for those between the ages of 50 and 64 to 18% for those aged 85 and older.
80% Spending Ratio
The consumption patterns of retired households revealed that, in terms of spending, they consumed on average 80% as much as working households. This differential may exist because certain expenses, such as investing for retirement and work-related costs, are no longer part of household budgets after individuals leave the workforce. Two-thirds (66%) of retired households experienced a drop in spending compared with their working counterparts. In terms of income, the median annual income of retirees was 57% that of working households.
Households with long-term care (LTC) insurance and private health insurance typically spent more than those without these benefits, even after controlling for income and other factors. EBRI could not explain why LTC was such an important factor in expenditures. It may be that households with higher incomes are better able to afford both LTC insurance and private health insurance. EBRI also noted that individuals in poor health frequently reduce spending, especially when they near retirement.
Although every household has unique spending patterns, a review of the EBRI study, Expenditure Patterns of Older Americans, 2001-2009, may be helpful for planning purposes. Given recent increases in property taxes in many communities, retirees may continue to face rising housing expenses in the years ahead. Concerns about the financial condition of Medicare may require retirees to shoulder an ever-increasing portion of their medical costs. Even though LTC insurance and private health insurance may result in higher expenditures, they may become necessities for many.
1Source: Employee Benefit Research Institute, Expenditure Patterns of Older Americans, 2001-2009, February 2012.