How Expenses Change in Retirement
After you’ve spent decades working, retirement can be like an extended vacation – full of time spent with grandchildren, hobbies, and relaxation. However, the transition to retirement can be as challenging as it is rewarding.
One major challenge that many new retirees face is the adjustment from saving for retirement to spending their nest egg. To ease this transition, it is important to understand how your expenses will change once you reach retirement – and plan accordingly.
Retirees Spend Less on Work Related Expenses
Many people don’t realize how much money their job costs them until they retire. For example, in retirement you no longer need to pay for transportation to and from the office, lunches away from home, or maintain a separate wardrobe for work.
Data from the Bureau of Labor Statistics shows that the average retiree saves a significant amount each year in the following three areas.1
- The average annual transportation budget of a person over age 75 is about $5,100 while pre-retirees – those ages 55 through 64 – spend about $9,500 per year.
- The average person over age 75 spends about $1,300 in restaurants per year while pre-retirees spend about $2,500.
- Retirees over age 75 spend an average of about $770 per year on clothing while pre-retirees spend over $1,500.
These averages tend to affect retirees who worked in an office job. However, your expenses could vary depending on your habits during your working years and retirement.
Most Retirees Have Lower Debt and Debt Payments
Many people strive to pay off their mortgage before they retire – which erases a major monthly expenditure. In fact, data shows that people aged 75 and older spend an average of $12,300 per year on housing while pre-retirees spend nearly $18,000.1
In addition to lower mortgage debt, retirees have less revolving debt than their working counterparts. Specifically, people aged 70 and older have an average of $9,800 in non-mortgage debt compared to $23,700 for those in their 50s. Like mortgage debt, lower revolving debt greatly reduces monthly payments.
Retirees No Longer Allocate Part of Their Budget to Retirement Savings
Obviously, retirees no longer need to contribute to retirement accounts. These savings are not technically an “expense,” but eliminating them does have a profound impact on your budget in retirement.
For example, if you contributed 10% of your salary to retirement savings during your working years, you do not need to replace that income during retirement. This change is one reason why retirees need less income than they did during their working years to maintain the same lifestyle.
Additionally, retirees aren’t typically required to pay FICA taxes – which pay for Social Security and Medicare benefits – since those taxes are only applied to income earned from employment. Most retirees still owe income taxes, but their tax expense is lower due than during their working years due to this change.
Medical Costs Can Increase in Retirement
While there are many areas of your budget that decrease during retirement, medical expenses are not one of them. The Agency for Healthcare Research and Quality reports that people over the age of 65 spend an average of about $1,250 on out-of-pocket healthcare expenses each year compared to an average of about $690 for all people. Additionally, 17.3% of people over age 65 had extremely high medical costs – over $2,000 out-of-pocket per year – compared to just 7.8% of younger adults.
To prepare for higher medical costs in retirement, it is important to understand your coverage options and choose the right Medicare supplement plan to meet your needs. Careful planning is even more important if you plan to retire early – before you become eligible for Medicare.
An Active Retirement Can Create New Expenses
For some people, retirement provides the opportunity to fulfill their bucket list including visiting new places and trying new things. These activities often add new expenses to your budget and tend to be particularly costly in the early years of retirement.
The Bureau of Labor Statistics reports that the average entertainment budget of a person between the ages of 65 and 74 is about $2,500 per year.1 However, these expenditures tend to decline with age and those over age 75 only spend an average of about $1,400 per year.1
The Bottom Line: Expenses Tend to Decline in Retirement
Even with higher medical and entertainment costs, estimates show that retirees typically only need between 50% and 80% of their preretirement income to fund their lifestyle in retirement. Again, the impact retirement has on your budget will depend heavily on the type of retirement lifestyle you want and your spending habits during your working years.
While you may not need to replace all your income during retirement, funding your chosen lifestyle still requires careful planning and investment management. A partnership with an experienced financial advisor is crucial to creating and maintaining a successful retirement plan.
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1 Foster, A. (2015) Consumer expenditures vary by age. Bureau of Labor Statistics: Beyond the Numbers. https://www.bls.gov/opub/btn/volume-4/pdf/consumer-expenditures-vary-by-age.pdf.
2 Fidelity (2023) What will my savings cover in retirement? Fidelity Viewpoints. https://www.fidelity.com/viewpoints/retirement/retirement-income-sources
