How much will I spend in Retirement?

How much do I need for my retirement? A simple question, but one which many, including financial advisors, struggle to answer. A rough rule of thumb used for financial planning is to assume spending in retirement to be 70% of current spending. But this is not accurate. In Singapore at least, retirees tend to spend the same amount, adjusted for inflation, after retirement as they do before retirement. This means that retirement plans need to aim higher to ensure a comfortable standard of living in retirement.

How much will I need for my retirement? A simple question, but one which many, including financial advisors, struggle to answer. The answer to “How much do I need for retirement?” has two parts. The one which is most often talked about is the asset side, how much do I need to save, invest and get in returns in order to have enough. We have touched on this previously as well here, here and here. Conversely, the liability side, or “How much will I spend in retirement?”, is usually brushed off with a couple of rules-of-thumb or assumptions and not given the same amount of thought.

While financial institutions have embraced the idea of Liability Driven Investments (LDI) for some time now, the same concept has not made its way into the Personal Financial Planning space. But with a little thought, we can see that “How much will I spend in retirement?” is really the key question to address when it comes to Personal Financial Planning, because it is far easier to adjust savings and investments to make sure that future retirement spending is covered, rather than to adjust spending in retirement because prior savings and investments were inadequate.

So, how do we figure out how much we will spend in retirement, and adjust our planning for it?

Some baseline estimates of retirement spending

Some attempts can be made to estimate a minimum or average baseline for retirement spending in Singapore. For example, here, the team at the Lee Kuan Yew School of Public Policy estimated the minimum amount needed for spending in retirement to be $1,379 a month (or $1,226 a month if the retiree owns his/her own home). For a couple, the monthly budget would be $2,350 (or $2,166 if they owned their own home).

Another source of data comes from the Department of Statistics’ Household Expenditure Survey 2017/18. This shows that in 2017/18, a retiree household (aged above 65 years) spent $2,699 per month (assuming home ownership), or an average of $1,154 per person. We show this below:

Average Household Expenditure by Age of Main Income Earner (2002 – 2018)

Source: Department of Statistics Singapore

Interestingly, looking across the four different Household Expenditure Surveys done 5 years apart, we see some consistent trends:

Expenditure (and income) has increased across all age groups over time
Expenditure peaks between the ages of 35 to 55 and falls thereafter all the way to retirement at age 65

Bear in mind however, that these research and survey figures are the minimum or average figures across a heterogeneous population of retirees, and hence would not a fully relevant to individual cases. It is hard to imagine that a person in his/her 50’s, and currently spending $5,000 a month, would suddenly downgrade spending to only $1,379 per month upon retirement!

Retirement spending as a proportion of current spending

A more practical way of answering the question “How much will I spend in retirement?” is to benchmark it off current spending. A rough rule of thumb used for financial planning is to assume that spending in retirement will be around 70% of current spending. This approach, in some ways, is similar to the notion of the replacement ratio, or how much income is needed in retirement as a ration of last drawn income. And this is borne out by evidence from the Household Expenditure Surveys:

Spending after retirement as a proportion of spending before retirement – Cross Sectional Analysis (2002 – 2018)

Source: Department of Statistics Singapore

As noted previously, expenditure is relatively stable between the ages of 35 to 55, and the proportion of household spending that is continued into retirement is between 50% to 70%. This ratio has been rising across cohorts, possibly reflecting the increasingly better economic environments experienced more recently.

This pattern of spending pre and post retirement also matches with the experience in other countries. For example, in the US, JP Morgan Asset Management finds that post retirement spending is also around 70% of pre-retirement spending levels.

Household spending patterns for the USA – Cross Sectional Analysis (2016 – 2018)

Source: JP Morgan Asset Management

But there are a few problems with estimating our future spending in retirement this way, namely:

This is a cross sectional study, comparing the spending of people who are aged 65+ today with people who are aged 50-64 today. Instead, we should be comparing people today with their younger selves. In other words, comparing the spending of people who are aged 65+ today, with people who were aged 60-64 five years ago, and people who were aged 55-59 ten years ago. This is what is known as a longitudinal study.
The expenditures we show above are for a household. As we age, the size of the household also falls, so we should look at per person retirement spending too.
Spending increases over time due to inflation. We need to look at the changes in retirement spending after accounting for inflation.

A better estimate of spending in retirement

1. Cross sectional vs Longitudinal Study

Let’s start with the first issue, the difference between a cross sectional study and a longitudinal study. Why does this matter? It matters because our spending patterns depend on our habits. And our habits depends on the environment we grew up in. Do you think that the spending levels and patterns of the generation which grew up drinking kopi siew dai, teh-c and eating kaya toast will be the same as the generation swilling Starbucks lattes, bubble tea and eating smashed avocado toast? Clearly not! So, there is no point comparing the spending of the people aged 65+ today with the spending of their younger counterparts today. Instead, we should compare the spending of the people aged 65+ today, with their younger selves aged 60-64 back in 2012/13, and again with their younger selves aged 55-59 back in 2007/08 and so on. This is what we illustrate below:

Change in Average Household Expenditure over time – Longitudinal Analysis

Source: Department of Statistics Singapore

What we are doing is to compare the columns outlined in red (and indicated by the red arrows). Similarly for those columns outlined in black (although the data does not go so far back). This still shows a decline of household expenditure as the head of the household gets older, but it is no longer as steep a decline as before. We show this is table form with the levels of household expenditures below. So in a longitudinal study, we look at the diagonal boxes which are in the red or black backgrounds.

Indeed, doing this longitudinal study is especially important as it is clear from the above chart that spending for the same age groups has risen steadily over time. This is more than by inflation alone, as lifestyle creep has influenced the spending of the younger cohorts in Singapore. Just as your grandmother said, back in the day, you could buy a bowl of noodles for 10 cents!

Average Household Expenditure by Age of Main Income Earner (2002 – 2018)

2. Household vs Individual Expenditure

The second thing we need to adjust for is the size of the household. In Singapore, the average size of a household where the parent(s) work is 3.6 persons. A retiree household, on the other hand, only has 1.93 persons on average.

Let us assume that the size of the household starts off at 3.6 persons when the head of the household is between 50-54, then drops to 3.3 persons five years later as the children start leaving for school or work, then to 2.8 persons after another five years, and finally to 1.93 persons when they are 65+. When we do so, the per person household expenditure looks like this:

Average Per Person Household Expenditure by Age of Main Income Earner (2002 – 2018)

Our individual expenditure actually increases as we age, even when we retire, instead of decreasing. One reason for this is inflation (which we will address next). Another reason might be that the younger members of the household do not spend as much as the adults, so in terms of the adults’ spending, there is actually a drop over time. But given the high expenditures on tuition and other youth related matters, this is unlikely to be the case.

3. Inflation

The last adjustment that we need to do is for inflation. Clearly, the figures in the Household Expenditure Surveys which we show above include the effect of inflation over time.

The inflation rate in Singapore for the periods which the Household Expenditure Surveys covers are:

2002 to 2007: 0.7% per year
2007 to 2012: 4.0% per year
2012 to 2017: 0.6% per year

When we adjust for inflation, the real growth in individual spending over time is as follows:

Average Growth of Per Person Household Expenditure by Age of Main Income Earner (2002 – 2018)

So finally, we get a full picture of how much a person will be spending in retirement. The surprising outcome is that in Singapore, a person’s spending increases every year (about 1%) in real terms from the age of 50 all the way through to retirement. After that, it remains constant in real terms. What this means in practice is that any retirement plan must be adjusted for inflation every year. A person spending $5,000 a month at the age of 60 will expect to spend $5,386 a month when he/she retires at the age of 65, and $5,802 a month when he/she reaches the age of 70. This assumes inflation is in the range of 1.5% to 2% a year.

This also means that the usual assumption financial advisors make to take 70% of expenditure before retirement as the guide for what you need in retirement is not accurate. Retirement spending is more accurately described by the lifecycle theory. This states that we actually prefer to spend a constant real amount every year over our entire life, rather than more in one period and less in another. Anecdotal evidence indicates that spending may even rise more in the first few years of retirement! Reduced spending on commuting to work, meals during work, clothes etc. are more than replaced by expenditures on leisure and travel in retirement, especially in the first few years.

Conclusions

Much of retirement planning assumes that expenditures will fall once we retire, as we will spend less on travelling, clothes, meals etc. during work hours. However, this is an incorrect assumption. In practice, people actually spend as much in retirement as they do before retirement. This means that saving and investing for retirement will need to aim higher to meet these higher expenditures as well.

Quick takeaways:

Take stock of your monthly expenditures when you reach the age of 50 to 60. This is a good point of reference because as the children in the household are older and spend less time at home, it becomes clear what are the expenditures you really spend on yourself
Assume that you will require the same level of monthly expenditures, adjusted for inflation, when you retire
Make sure that your retirement plan for saving and investment now, and income and withdrawal after retirement, is able to meet this level of expenditure
If the current saving and investment plan cannot meet this level of expenditures in retirement, either start saving harder now, or start cutting back on monthly expenditures!

Our next post will deal with where the retirement income comes from and what it is spent on. Do keep reading this blog for our future post where we shall also look at putting all these findings together to work out how much it costs to retire early in Singapore.