By Mark Miller

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 isnt enough, as spending habits change during retirement youre no longer paying the same taxes, saving for retirement or incurring work-related expenses for clothing and transportation. And saving habits change, too.A report from the nonprofit U.S. Employee Benefit Research Institute (EBRI) 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, EBRIs most important finding is that overall spending in retirement falls with age which means that a retiree wont 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 cant 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 data from the U.S. Bureau of Labour Statistics data that has suggested 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 50-64 spent 9% of their total budget on health items, while those 85 or older spent 18%.

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How much does retirement really cost?