The Government Accountability Office estimates retirees will spend 77 percent of what they spent in pre-retirement, according to a new report on the efficacy of retirement income replacement rates.
While retirement consumption habits are not uniform across income levels, the GAO's report found that average spending in retirement is in line with the median recommended retirement income replacement rate—77 percent.
GAO mined 2013 consumption data from the Bureau of Labor Statistics to measure spending habits for four income brackets throughout working and retirement years.
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They also examined scores of articles on replacement rates, and interviewed seven service providers, three retirement consulting firms, and four financial planners to understand industry's take on income replacement rates.
BLS data shows mid-career households, aged 45 to 49, spent an average of $58,000 in 2013, while young retirees, age 65 to 69, spent about $46,800, or 20 percent less.
In pre-retirement years, age 50 to 64, household spending was $54,400. In post-retirement, retirees age 65 to 79 spent $41,900.
By those averages, retirees need to replace about 77 percent of income in retirement, the report found.
The cost of housing accounts for the greatest expense both before and after retirement, though average cost goes down in retirement, to $13,700 in post-retirement from $17,000 in retirement.
GAO's research shows 35 percent of retirees age 65 to 69 are still paying down a mortgage.
The only expense to increase in retirement is health care. Young retirees, age 65 to 69, spend $4,900 on health care, a cost that lowers slightly as retirees age, but increases as a percentage of total spending.
About 15 percent of what older retirees spend is on health care, the GAO found.
By comparison, mid-career earners spend an average of $3,500.
Pre and post retirement spending was level among the lowest earners.
Low-income younger retirees spend $23,500 on average, with 39 percent of that going to housing, and 19 percent to food.
The highest income earners spent $82,200 in early retirement, 31 percent of which went to housing and 12 percent went to food. The highest earners' consumption peaked at more than $100,000 for workers age 50 to 54.
While the report recognizes the value of replacement rates as a tool for adequate retirement preparation, it says more work needs to be done to refine estimating tools, and specifically recommends the Department of Labor update the replacement rate calculators featured on its website.
Of the 14 industry representatives interviewed by GAO, only six said they recommend a replacement rate to clients. Four of those that do use customized replacement rates for clients.
Of the eight stakeholders that don't recommend replacement rates, two financial planners said individual needs are too nuanced to benefit from replacement rate tools, and that unique household needs change over time.
A copy of GAO's report can be found here.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
