Many people dream about how their retirement years will play out. Some want to spend their golden years spoiling the grandkids, while others envision traveling the world. As long as retirees have saved enough during their working years to fund the expenses, these goals are attainable.
Unfortunately, not all Americans know what to expect regarding living expenses during their retirement years. They may not know how to budget for ordinary costs in retirement, like housing and transportation, or make the most out of retirement income. Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend and how much they need to budget for retirement.
Average Retirement Expenses by Category
According to the Bureau of Labor Statistics, an American household headed by someone aged 65 and older spent an average of $48,791 per year, or $4,065.95 per month, between 2016 and 2020. More specifically, households headed by someone between the ages of 65 and 74 spent $53,916 annually during these five years, while spending dropped to $41,637 annually for people aged 75 and older.
The typical budget for retirees needs to cover that amount every year for a retirement that could stretch over two or three decades.
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Retirees usually spent less than the American average, which was $60,593 per year, or $5,049.42 per month. Retirees also less than people nearing retirement, those aged 55 to 64, who spent $65,392 annually between 2016 and 2020.
Drilling down to specific categories can help retirement savers determine benchmarks for their own budget.
Housing expenses, such as mortgage payments, insurance, and maintenance costs, are among the highest costs retirees face.
From 2016 through 2020, Americans aged 65 and older spent an average of $16,880 annually, or $1,406.68 per month, on housing-related costs.
These expenses can vary dramatically by location and housing type. For example, housing costs are typically much higher in a coastal California community than in a real estate market in a state with relatively low property taxes, such as Wyoming, South Carolina, or Colorado.
Many retirees want an action-packed retirement full of entertainment, socializing, visiting family, and traveling the country. That means that transportation costs can be a significant factor in retirement expenses, especially early in retirement.
Americans spent an average of $11,910 per year getting from point A to point B between 2016 and 2020, but retirees spent a little less. Those over age 65 spent an average of $7,062 annually on transportation, or $588.50 per month. People aged 65 to 74 spent $8,497 per year, and people 75 and older spent $5,073 per year. These numbers cover everything from buying a car to filling up the gas tank and could be significantly higher for those who spend a lot of time traveling.
Retirees who don’t own a car may still need to factor the cost of public transportation into their annual retirement costs. Buses, subways, and other public transportation sources cost older generations $526.80 per year.
Americans’ healthcare costs — including health insurance, medical services, medical supplies, and prescription drugs — increase as they grow older. With age comes aching joints, injuries from falling, and sometimes chronic diseases like arthritis, diabetes, or Alzheimer’s. Americans spent an average of $4,976 on healthcare annually between 2016 and 2020, but this is one area where retirees spend more than their younger peers.
People over age 65 spent an average of $6,583 per year, or $548.62 per month, on healthcare from 2016 through 2020. Costs vary from person to person depending on their genetics, injuries, and lifestyle choices. For example, if heart disease runs in the family or you are a smoker, you may want to save extra for retirement healthcare costs.
If you have a high deductible health insurance plan, consider saving with a health savings account (HSA), which offers tax-advantaged savings to cover healthcare costs.
Households run by someone age 65 or older spent $6,207 annually, or $517.23 monthly, buying food from 2016 through 2020. Those aged 65 to 74 spent $6,864 per year, and those over 75 spent $5,274. These food expenses include groceries, alcohol expenditures, and meals eaten at restaurants.
An individual’s food costs will vary depending on their diet and habits. For example, people who buy organic vegetables will likely spend more on produce than people who don’t. There’s also a good chance that eating at home more frequently will cost less than eating out five times per week.
Having fun isn’t just for the young. From 2016 through 2020, people over 65 spent an average of $2,527 annually on entertainment, or $210.55 monthly, on fees and admissions to places like museums, theater performances, and movies. Entertainment expenses also include hobbies and pet costs.
People aged 65 to 74 spent $3,080 per year on entertainment during the past five years. However, once they hit age 75, spending on entertainment dropped to $1,749 annually, perhaps as mobility decreased.
5 Steps to Set Up a Retirement Budget
Once you have an idea of potential retirement expenses, you can start to save and comprehensively budget for them. Since every retirement looks different, there is no average retirement budget. Nonetheless, these are the steps to create a budget that may work for you.
Step 1. Contribute to a Retirement Account
You may already have retirement savings in your company-sponsored 401(k) or a similar retirement plan. But those who don’t have access to a 401k or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA. These accounts can provide tax-advantaged ways to start retirement with adequate savings to build a budget.
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Step 2: Make a List of Expected Monthly Expenses
Most expenses can fit into one of three categories: fixed, variable, and one-time.
Fixed expenses are payments that occur regularly and stay the same from month to month, like mortgage/rent payments, property taxes, and car payments.
Variable expenses change from month to month, depending on personal usage and price fluctuations. Standard variable costs include utility bills and groceries. Likewise, any entertainment expenses, medical expenses, pet care, and personal care expenses may be variable.
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One-time or non-recurring expenses are costs that don’t occur regularly. These might include a new roof, a vacation, or a wedding. You may want to set aside money in an emergency fund for unexpected expenses (like that new roof) and have other funds earmarked for non-essential, one-time expenses (like a wedding or vacation).
To get an idea of your various expenses, gather payment information from bank statements, credit card statements, receipts, and bills. Take a look at what you spend now, then deduct expenses you won’t have at retirement (perhaps you’ll eliminate a car payment or pay off your mortgage). Then you can tally what’s left to get an estimate of your projected expenses and build a line-item budget.
Step 3: Estimate Retirement Income
To get a sense of your potential retirement income, look at projected monthly withdrawals from Social Security, retirement accounts, pensions, real estate investments (like a rental property), and any savings or part-time income. Total them up to figure out what your monthly income will be.
Step 4: Compare Expected Expenses to Expected Income
In an ideal world, your expected income will be a larger number than your expected Ideally, your expected income will be larger than your projected expenses. If this is not the case, you can remedy this issue by reducing costs or increasing income.
To reduce expenses, you may consider downsizing your home or going from owning two cars to one. You may also consider streamlining entertainment expenses as a better way to cut costs.
To increase income, you may consider taking on a part-time job when you retire or look to passive income sources to boost the money that you have to spend during retirement.
Step 5: Figure Out When You Can Retire
Once you know how much money you may need in retirement and how long you’ll need to save to get there, you can plan a realistic timeline for when you can retire. Keep in mind that the plan will likely change over time as you get closer to retirement, depending on how much you’re able to save and how your retirement goals change.
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Budgeting for retirement can feel overwhelming, but taking it step by step allows you to create a plan for a retirement you’ll enjoy.
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