Household Spending Could Imperil Retirement Savings: Study

A Center for Retirement Research study finds that retirement security may have been compromised by increased spending during the unprecedented housing boom, according to a new study by the Center for Retirement Research of Boston College.

Researchers found that every 10 percent increase in housing prices from 1995-2007 boosted household spending non-durables such as food and drink, eating out, clothing, entertainment, gasoline, and leisure by four percent. But as housing prices fell, there was no correlating decrease in spending.

Four percent may appear small, but, the report cautioned, that represents only one year. Households that continued their higher spending level over 20 years could consume over half of the increase in its house value.

For those who think of their house as an asset that will increase in value and eventually be sold, this counter-productive behavior can have a serious impact on their retirement income, the study found. Households that increase their spending without saving more do so because they believe that because their home is worth more that will compensate.

In 2007 before the economic crisis, a Spectrem Group study found that 51 percent of retirement plan participants considered equity in their primary residence as a resource to fund their retirement needs. In a 2011 wealth level study of Millionaire households with a net worth between $1 million and $4.9 million (not including primary residence), the same percentage said that the key lesson learned from the economic downturn was that their primary residence is not a stable financial asset.

“It may be perfectly reasonable for a household to spend a bit more when the value of its assets rises-if the increased value of the assets is sustainable,” the CRR report states. “However, the housing boom was a temporary phenomenon, and of course, it has been followed by a steep and prolonged decline in prices….One finding of potential concern for retirement readiness is that, while households are willing to spend more when the value of their house rises, they appear less likely to tighten their belts when their house price falls”.”

Investors may be getting the message. Seventy percent of the Millionaire investors we surveyed consider themselves to be “savers” more than “spenders.” Thirty-four percent surveyed said that the recession had compelled them to reduce their debt, while 20 percent said they had increased their savings in deposit accounts.