Spending and saving habits in the US: lessons for the UK
How people save and spend money is changing, due to recent financial turbulences, new technologies, social changes and increased longevity.
It’s vital that employers understand these changes to ensure the support they provide is as effective as possible.
To apply an international lens to these issues, Standard Life spoke to an international expert on pensions and retirement, David John, a senior strategic policy advisor at the AARP Public Policy Institute in the US.
Below is a summary of John’s thoughts on the range of topics discussed.
Emergency savings: how much is enough?
In the US, emergency savings accounts are growing as an employer-based benefit.
In one AARP (formerly American Association of Retired Persons) poll, 70% of people said it was something they wanted.
It’s been found that if people use emergency savings, it’s likely to stabilize their household finances for up to four years.
What works especially well for emergency savings is payroll deduction – for example, 3% from a person’s salary each month.
But the nature of this payroll deduction is crucial. If people have to set up a bank account or some other way of starting the process, they often never get around to doing it.
But with an automatic enrolment mechanism, into a separate emergency savings account, participation increases by about 50 percentage points. It also increases the amount of emergency savings people have.
The way emergency savings are “framed” also matters.
A general rule of thumb accepted by financial advisers is that you need roughly three months of emergency savings. But what they're doing is conflating two separate risks.
One risk is what happens if, for example, your car engine needs sudden repair. The other risk is what happens if you lose your job.
If you lose your job, you may need the three months savings. But for other types of unexpected expenses, having as little as about one month's earnings is usually enough.
In fact, when it was suggested to people that they try to save three months’ worth of salary for emergencies, a lot of them threw up their hands and said, “Well, I can never do that – so I'm not even going to try.”
Spending less (and less) in retirement
There’s understandably a lot of talk about how much money people need to save for their retirement.
But there’s perhaps less discussion about how much people actually spend in retirement, and when.
The Rand Corporation, a nonprofit global policy think tank, researched spending behaviours during retirement and found two key trends.
- Many people in the first year of retirement spend as much or even more than they did before retiring, because they're rewarding themselves for their years of work.
- As time goes by, people in retirement spend less. This decline is somewhere between 1.5% and 2% a year, year-over-year. And it’s true across all income groups, ethnic groups, and genders.
Part of this second trend is due to changed circumstances or health issues.
For example, more expensive tourism costs could affect a person’s travel plans as they move through retirement.
But another factor is that people just don't enjoy as much the experiences they previously spent their money on such as car trips and eating out.
So an individual who retires in the US at age 65 will spend about half as much as they did when they reach age 85.
That said, the desire to make gifts, donations and contributions to charitable groups starts to increase in these later years.
Back to work
Recently there’s been an uptick in retirees who are returning to work.
So AARP surveyed retirees to find out their reasons for doing so. Insufficient income was expected to be the principal reason, but this was only the case for about half of people.
The other half returned to work for social and psychological reasons. Their social network was connected with work, they got bored, and they needed a sense of purpose.
The retirement industry tends to consider retirement as a financial decision. But it's just as much a psychological decision.
Ultimately, retirement is a foreign country and you really don't understand it until you get there.
In partnership with Standard Life
Standard Life are part of Phoenix Group, the UK’s largest long-term savings and retirement business. We both share an aligned ambition to help every customer enjoy a life full of possibilities.
