A New Study Links Partial Retirements to a Surge in Spending. What Gives?

What You Need to Know

A new J.P. Morgan study of 280,000 households shows more than half of American couples phase into retirement.
Partially retired households spend more, and they have more debt and lower savings than their fully retired peers, the study shows.
Advisors can use the data to spark deeper conversations about budgeting and the timing of retirement.

Retirement researchers commonly warn us about the practical and professional challenges associated with “phased” or “partial” retirements, with many analyses concluding that most people end up leaving the workforce outright between ages 60 and 65 for reasons that are wholly or partially outside their control.

That warning is a sensible one in its context, according to Sharon Carson, an executive director and retirement strategist at J.P. Morgan Asset Management, but it’s also potentially misleading. That is, while it may be true that any given individual is statistically unlikely to achieve a phased or partial retirement, when one looks at household-level data, this is a much more achievable outcome for married couples who are strategically coordinating their retirement decisions.

In fact, proprietary Chase Bank data featured in a new survey report penned by Carson shows that more than half of American households do not retire all at once, if one counts individuals working at least part time in retirement and spouses retiring at different times.

Notably, these partially retired households tend to spend more in the years preceding retirement and continue to spend more post-retirement than their fully retired peers — a finding that Carson called both eye-opening and significant from a financial planning perspective.

The truth is that some of these households may be enjoying a surplus of work income plus new retirement income drawn from accumulated savings. Others, however, may simply be spending more out of necessity as the cost of living increases and they confront potentially difficult situations with respect to health care spending, new caregiving obligations and more.

Ultimately, Carson said, retirement spending patterns vary significantly from household to household in the real world, with households that have pre-retirement income of less than $150,000 more commonly experiencing this “spending surge” post-retirement.

In light of these findings, Carson said, financial professionals can spark new conversations with their clients about their desired retirement timeline, helping to balance the risks associated with longevity and spending volatility and gauging whether flexible retirement income options might help them meet their goals.

How Spending Changes in Retirement

Preparing for a financially successful retirement requires careful planning, Carson said. What starts out as a relatively straightforward effort of maximizing accumulation eventually evolves into a highly complex and personalized income equation.

“Most Americans are encouraged to save as much as they can during their working lives,” Carson observed, “but what happens when they enter a new stage by retiring and their focus shifts from saving to spending?”

To answer that question, Carson and her team took a closer look at the spending patterns of Americans by leveraging anonymized data from more than 280,000 Chase households. Their key finding is that people generally spend less than expected, but some spend much more.

In fact, for partially and fully retired households with investable assets of $250,000 to $750,000, the annualized inflation-adjusted increase in retirement spending is just 1.65%. That shift may be as much as one percentage point lower for retirees than the overall projected inflation rate, Carson explained, even after taking into account the increased inflation rate for health care and increased use of health care at older ages.

But the findings aren’t all so positive. Health care budgeting requires particular attention, for example, because it increases with age and can result in late-in-life bankruptcy that is impossible to recover from. For planning purposes, financial professionals may want to use an estimated 6% annual cost increase for Medicare-related expenses, Carson said. This equates to approximately $6,500 per year, per person, for the most comprehensive Medicare coverage available.