NEW YORK | Thu Feb 23, 2012 5:08pm EST (Reuters) - Most retirement planning exercises begin and end with a simple question: How much income will you need to replace after you quit work?

But looking at income alone isn't enough, as spending habits change during retirement – you're no longer paying FICA taxes, saving for retirement or incurring work-related expenses for clothing and transportation. And saving habits change, too.

A new report from the nonprofit Employee Benefit Research Institute looks at the interaction of income, expenses and savings in retirement. Using survey data from 5,000 retired households from 2000 to 2009, the report details how different socioeconomic groups of older Americans are faring in retirement.

Although the median income for retired households is 57% that of working households, retired households spend about 80% of what working households spend. More affluent households, which have been able to save for retirement, use those assets to plug the gap between income and spending.

From a retirement planning standpoint, EBRI's most important finding is that overall spending in retirement falls with age, which means that a retiree won't need a constant replacement rate of pre-retirement income. The EBRI research also reflects the profound influence of income inequality and job loss on retirement security.

"The main reason is that health deteriorates with age, and that means people can't necessarily do all the things they planned," says Sudipto Banerjee, research associate at EBRI and author of the report. "Discretionary spending on things like vacations and entertainment fall."

That finding reinforces what my colleague Linda Stern reported recently, namely that U.S. Bureau of Labor Statistics data shows that the early years of retirement are the most expensive.

The two largest expenses in retirement are non-discretionary: housing and health care.

Housing costs, in particular, point to the economic squeeze facing lower-income seniors. EBRI found that housing made up 47% of expenditure in 2007 for the lowest-income quartile, compared with 41% for the highest-income quartile. Health spending was steady across all income groups, at 9% to 11%.

But spending on health increases with age. In 2009, people between the ages of 50 and 64 spent 9% of their total budget on health items, while those 85 or older spent 18%.

In its annual estimate, Fidelity Investments said a 65-year-old couple who retired in 2011 would need $230,000 to pay for out-of-pocket medical expenses, excluding nursing home care.

Single people, African Americans and high school dropouts were among groups that outspent their resources and found it the most challenging to maintain a secure retirement, EBRI found.

Overall, households in the lower half of income distribution experience a rising gap between income and expenditure even before retirement. Households in this group are seeing savings deteriorate between ages 50 and 64, a period of life that should be years of high savings accumulation for retirement.

"This might be the result of rising health care costs," Banerjee says. "These households don't have much of a wealth cushion there to support them through a large expenditure shock, like a catastrophic health problem."

"Some of these groups will see falling living standards in retirement," he adds. "There's just no magic wand solution."

Households in the top half of income distribution also see their resources dwindling with age, but they are maintaining surpluses throughout retirement, according to the EBRI report.

The household study that EBRI used to generate its report came from the Health and Retirement Study conducted by the Institute for Social Research at the University of Michigan, which contains detailed data on spending in 32 different categories.

(Editing by Jilian Mincer and Andrea Evans)

© 2010 Thomson Reuters. Click for Restrictions.

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