Yahoo Finance You're going to need a bigger pension: spending booms in early retirement
Far from slowing down, pensioners are accelerating their spending in the decade after they retire and risk running out of cash as a result, new research has warned.
Spending on bills grows by £350 per person every year between the ages of 75 and 85, according to the Institute for Fiscal Studies, a think tank.
Retired households’ outgoings tend to increase through their 60s and 70s, in part due to pensioners taking more holidays after they give up their jobs. The average 75-year-old pensioner spends £430 per person more on holidays than they did at age 67, research found.
The cost of household services, including spending on domestic cleaning and home help, rises from a person’s mid-70s onwards. The findings dispel the myth that spending falls in retirement, with most retirees planning to spend more during the first years after they stop work.
Millions of people using modern "defined contribution" pensions to draw down an income as and when they like are at risk of running out of money in later life if they have overestimated their retired spending.
Retirees aged 79 to 83 with above-average incomes told the IFS their annual outcomes increased by £1,200 per person between the ages of 67 and 75.
A typical private pension pot could run out after just 10 years, assuming someone aged 65 has an average pension pot of £135,000 and draws out £11,000 in annual income, according to analysis from Interactive Investor, the stockbroker.
Rebecca O’Connor, of Interactive Investor, said: “There’s a risk people assume they won’t spend as much as they enter their 70s and 80s, which turns out to be false.”
Those planning for retirement typically underestimate their spend on socialising, entertainment and holidays in the early years. But they may also misjudge costs for their 80s and 90s. Fixed costs mean that spending on bills doubles when a partner dies, the report found.
Running out of money during retirement is the biggest risk with the flexible “drawdown” approach to taking an income in retirement. However, retirement incomes do usually continue to rise over time with annual state pension increases and surviving spouses receiving benefits especially if their partner was a member of a defined benefit scheme, the IFS said.
Heidi Karjalainen, of the IFS, warned that pensioners risk unexpected shortfalls in living standards at older ages. She said: “As retirement incomes are increasingly funded by defined contributions pots, which can be accessed flexibly, more and more retirees face complex and consequential decisions about how quickly to draw down their pension wealth.”
Reader Service: Do you know how much you should pay into your pension? Learn how to boost your pot by consolidating your pensions.
