In the first five years of retirement, American seniors are likely to face significant financial challenges in making ends meet. According to a survey of Americans who retired between 1992 and 2014 conducted by the Consumer Financial Protection Bureau (CFPB), over half (51%) had income, savings or other non-housing assets allowed them to maintain the same level of spending for a period of five years after retirement.
However, CFPB also found that the ability to maintain that same spending level during that period in retirement was connected with “large spending cuts in later years,” the Bureau said in a press release announcing the study. The study also found that the ability for a recent retiree to maintain the same level of spending within the first five years of retirement varied significantly by demographics including race, sex, generational status, marital status, health and level of education.
For instance, 58% of men are able to maintain the same level of spending within the first five years of retirement compared to 42% of women in the same period of time, the research brief details.
Additionally, retirees born before 1946 — part of the generation immediately preceding baby boomers — demonstrated more of an ability to maintain the same level of spending the first five years after retirement when compared to their generational successors.
“Retirees’ reductions in spending, which for many are substantial, deserve to be examined further as they raise questions as to whether the reductions are adversely affecting retirees’ quality of life and/or essential expenses,” the CFPB writes in its research brief about the study. “For homeowners, entering retirement without mortgage debt, for those with a pension, choosing a monthly annuity rather than in a lump-sum payout, are positively associated with retirees’ ability to maintain the same spending level for five years.”
Accompanying the new research brief is also a blog post from the CFPB Office of Older Americans, offering suggestions for ways in which those who are close to retirement can best prepare for their no-working years. Among these suggestions, CFPB’s Hector Ortiz writes that waiting until full retirement age to take Social Security benefits can be a very positive step based on the data from the study, as can avoiding a pension lump-sum payout; reducing debts and paying off an existing mortgage.
“Our study examined the financial situation of Americans within their first five years of full retirement and found that 49% were not able to maintain a consistent level of spending during their early retirement years,” Ortiz writes. “As a result, these retirees made large spending cuts in areas such as their housing, food, and transportation within their first ten years in retirement.”