A trend among modern retirees to increase their spending as they get older could mean that some run out of money during their lifetime. The new research is an important reminder to consider how your spending needs will change during your retirement.

Traditionally, spending has been higher during the initial few years of retirement as retirees tick off milestone goals and bucket list items before spending settles down. And in recent decades, as people live longer, spending has also increased in later years as some people have needed to pay for care.

However, new research suggests that if you rely on this outdated information, you could find that your retirement income needs aren’t met.

On average, spending increases by 7% each year among retirees until they reach 80

According to a study from the Institute for Fiscal Studies, far from spending settling down as retirement progresses, today’s retirees are likely to find that their income needs increase.

Among those born between 1939 and 1943, spending increased by an average of 7%, or £1,200, each year, between the ages of 67 and 75, after accounting for inflation. In fact, spending continued to rise until about the age of 80.

The desire for a larger income for longer is in large part driven by increased spending on holidays. On average, spending on holidays increased by £430 between 67 and 75. Spending on bills and household services, such as domestic cleaning, also increases during these ages.

In many cases, people retiring today will not have a guaranteed income from their pension unless they choose to purchase an annuity.

Instead, many will access their pension flexibly and will be responsible for ensuring they are taking a sustainable income to ensure pension savings last a lifetime. As a result, the new research suggests that retirees need to carefully consider how income needs may need to change to achieve the lifestyle they want.

Heidi Karjalainen, a research economist at IFS and author of the report, said: “As retirement incomes are increasingly funded by defined contribution pots, which can be accessed flexibly, more and more retirees face complex and consequential decisions about how quickly to draw down their pension wealth.

“If the spending of current retirees is a good guide to how people in the future will want to spend, planning drawdowns on the basis of reduced spending needs in later retirement may not be wise as it may result in unexpected shortfalls in living standards at older ages.”

Managing pension withdrawals in a low-interest high-inflation environment

One of the challenges facing retirees is that spending needs are likely to be rising at a much faster pace than they expected due to high rates of inflation.

In the 12 months to June 2022, the inflation rate reached a 40-year high of 9.4%. That means that goods and services that cost £10 a year ago will now cost £10.94. That might not seem like a huge difference but across all your spending, it adds up. Some areas of spending have increased at a much higher rate too, including essential outgoings like energy and food.

While the Bank of England has increased its base interest rate several times, it still remains low at 1.25%. As a result, cash savings are unlikely to be keeping pace with inflation and are falling in value in real terms.

For retirees who want to increase their spending to enhance their lifestyle, this can create an obstacle. Spending will need to increase even further once they consider inflation, and interest on savings is unlikely to bridge the gap.

How can you manage growing income needs?

If you’re nearing retirement, understanding how your income will need to change to help you achieve your goals is crucial.

Setting out your aspirations before you retire can help you effectively manage withdrawals from your pension from the start. If you know that your spending is likely to increase each year, you’re in a better position to ensure that your withdrawals remain sustainable.

As your income needs may grow, getting the most out of your money remains important, even when you’ve given up work.

Traditionally, retirees have reduced how much risk their investments, including pensions, are exposed to. As retirements become longer and more flexible, this approach may not be right for people that are planning their retirement today. Instead, creating a balanced portfolio that aims to deliver long-term returns may be more appropriate.

We’re here to help you create a retirement plan that provides solutions to the challenges that modern retirees face and put your mind at ease. Setting out a long-term financial plan can mean you’re able to get the most out of this stage of your life.

Please contact us if you’d like to talk about your ideal retirement lifestyle and how you can achieve it.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.