Sleeping in until noon. Spoiling the grandkids with gifts and freshly baked cookies. Traveling around Western Europe to sip wine and eat croissants. Many people dream about how their retirement years will play out. These goals are 100% attainable—as long as retirees have saved enough during their working years.
Unfortunately, not all Americans know what to expect for the cost of living during their retirement years. They aren’t sure how to budget for typical retirement expenses like housing and transportation, let alone a flight to France or a never ending stash of cookie dough for the grandchildren.
Generally, retirees spend less than they did when they were younger. They may have paid off their mortgage, and they probably aren’t paying to feed their children every day or fill up their gas tank to drive them to soccer practice.
However, it’s important to remember that “paying less” doesn’t translate to “paying nothing.” Some people may be surprised by their expenses in retirement.
Ideally, people will have saved enough in their IRA or employer-sponsored retirement account to cover their retirement expenses. But to know how much to save, people must first learn how much they should plan to spend.
Average Retirement Expenses
Granted, people retire at various ages. Everyone has likely met at least one 70-year-old who is still working and one 40-year-old who plans to retire within a decade. But for the sake of estimating retirement expenses, let’s use the benchmark of people retiring at age 65.
Now for retirement costs: According to 2018 data from the Bureau of Labor Statistics , Americans aged 65 and older spend an average of $50,860 per year, or $4,238.33 per month. More specifically, those aged 65 to 74 spend $56,268 annually, and people aged 75 and older spend $43,181 annually.
Those expenses are lower than the average for all Americans, which is $61,224 per year, or $5,102 per month. Retirees spend less than people aged 55 to 64, who spend $$66,212, and even less than Americans aged 45 to 54, who spend $75,387 every year.
So, many people can expect to pay less after retirement. While that’s great news for anyone worried about saving for retirement, it can still be helpful to break down how much they plan to spend and how long they expect to live.
If a woman retires at age 65 and passes away at 81 (the average life expectancy for women in America as of 2019), she could end up spending $813,760 during retirement. Hopefully, she either had already saved enough to cover that retirement budget, or had loved ones she could lean on for financial assistance.
These numbers are just national averages, though. Everyone’s lifestyle is different. Depending on a person’s location, health, hobbies, and other factors, they could spend thousands above or below the average.
Let’s look at the average retirement costs for retirees, as well as factors that could affect someone’s personal expenses. While the Bureau of Labor Statistics provides the average annual retirement expenses, that can be broken down into average monthly expenses in retirement.
Housing and Living Expenses
In 2019, Americans aged 65 and older spent an average of $17,472 annually, or $1,456 monthly, on housing-related costs, which is below the national average of $20,679. People aged 65 to 74 spent $18,709, and those 75 and older spent $15,806.
Do these numbers seem high? Well, “housing” doesn’t just refer to paying rent or a mortgage. A person’s housing costs consist of multiple factors.
Homeowners over age 65 spend an average of $6,235 on their homes per year, while renters spend an average of $2,571. Why do homeowners pay so much more? They aren’t just paying for shelter.
They’re also covering the costs of mortgage interest and charges, property taxes, and more. In fact, expenses that may seem small to some—like insurance, maintenance, and repairs—cost homeowners over age 65 $2,504 annually.
Regardless of whether someone owns or rents their home, things like utilities, fuels, and public services will take a chunk out of their retirement budget, too. People over 65 spend $3,810 on services like electricity, natural gas, water, and telephone access.
Of course, these expenses can vary dramatically depending on where someone lives and what types of home they live in, making the idea of average spending in retirement seem almost silly. For example, if John owns a four-bedroom home in Los Angeles, and Derek rents a one-bedroom cabin in Appalachia, comparing their housing costs is like comparing apples and oranges.
Oh, and John owns a vacation house in Colorado so his family can ski when his grandkids are on winter vacation. That means John has a second set of mortgage charges, property taxes, repair costs, and utilities to think about. No wonder his retirement expenses are higher than Derek’s.
People in their 20s and 30s may not expect to leave their house much once they’re retired—. Retirees can’t possibly spend that much money on transportation, right?
People age 65 and up aren’t as old as young people think. Plenty of retirees drive to the movies, take the bus to visit a friend across town, fly to visit family for the holidays, or book a trip they’ve been dreaming of for years.
Americans spend an average of $9,761 per year getting from point A to point B, but retirees spend a little less. Those over age 65 spend an average of $7,270 annually on transportation, or $605.83 monthly.
People aged 65 to 74 spend $8,810 per year, and people 75 and older spend $5,098 per year. These numbers refer to everything from buying a car to filling up the gas tank to purchasing a bus pass.
Retirees who don’t own a car will likely spend less since they’d be expenses like car insurance, licenses, gas, motor oil, and repairs from their list of things to worry about.
But they may still need to factor the cost of public transportation into their annual retirement costs. Buses, taxis, and trains cost older generations an average of $711 per year
Americans’ healthcare costs increase as they grow older. With age comes aching joints, injuries from falling, and sometimes issues like arthritis, diabetes, or Alzheimer’s. Americans spend $4,968 on healthcare every year, but this is one area where retirees spend more than their younger peers.
People over age 65 spend an average of $6,802 per year, or $566.83 per month, on healthcare. Those aged 65 to 74 pay $6,711, and people aged 75 and older spend even more—$6,930.
Healthcare refers to expenses like health insurance, medical services, medical supplies, and prescription drugs. Costs vary depending on retirees’ genetics, injuries, and lifestyle choices.
For example, someone with a family history of ovarian cancer could contract the disease by no fault of their own, while a 75-year-old who has smoked cigarettes since age 16 could be at a higher risk of developing lung cancer. A person who suffered from a serious car crash 20 years ago may still have to see a doctor for ongoing pain.
People who want to prepare for eventual healthcare costs may want to save extra money for retirement with a health-savings account (HSA). People can save for general retirement expenses in an HSA, but this type of account is useful specifically for healthcare costs.
People over age 65 spend $6,607 annually, or $550.58 monthly, buying food. Those aged 65 to 74 spend $7,311 per year, and those over 75 spend $5.592. This includes both food at home and food at restaurants and fast food chains.
Retirees spend less on food than Americans in general, who feed themselves for an average of $7,923 every year.
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 buy conventional vegetables. There’s also a good chance that eating at home more frequently will cost less than eating out five times per week.
It looks like people become more generous with age. The average American gives $1,888 per year to a cause. Americans over age 65 donate an average of $2,625 per year, or $218.75 per month. Those aged 65 to 74 give $2,755 annually, and those aged 75 and up give $2,440.
Is it because retirees have fewer expenses? Is it because their values change as they grow older? Who knows! One thing is certain: Retirees are good at squeezing charitable contributions from their retirement budget.
Having fun isn’t just for the young! People over 65 spend an average of $2,958 annually on entertainment, or $246.50 monthly.
People aged 65 to 74 spend $3,801 per year, which is higher than the national average of $3,226. Once people hit age 75, however, their fun fund drops to $1,763. Maybe it actually is more difficult to get out of the house once they reach a certain age.
These dollars go toward fees and admissions to places like museums and workout classes and toward audio and visual services, such as theater performances and movie outings. Entertainment expenses also include hobbies and food and toys for pets.
Some people call them vices, other people call them indulgences. Either way, it’s important to account for them. People who smoke cigarettes or regularly drink alcohol should prepare to drop money on those indulgences, just as they did when they were younger. People who take comfort in retail therapy should budget for a few big trips to the mall every year. Simple purchases like books or practical clothing are also a consideration.
Now that someone is retired, maybe they’d like to spend their free time taking a class at the local community college. Or they want to treat their family to a beach trip and rent a condo along the water. These are all expenses to think about when creating a budget for retirement.
5 Steps to Set Up a Retirement Budget
It is always a good idea to get a clear idea of one’s financial income and output—whether you’re in your 20s, 40s, or 60s—and it’s especially important in planning for retirement costs. There are some easy steps to take now to set up a retirement budget for the future.
Step 1: Make a List of Expected Monthly Expenses
People typically have three types of expenses: fixed, variable, and one-time. Fixed expenses are things like mortgage/rent, property taxes, possibly some utility bills, car payment.
In other cases, some utility bills might be variable—changing from month to month. Likewise any meals and entertainment expenses, medical expenses, pet care and personal care expenses may be variable.
Finally, there are one-time or non-recurring expenses. A new roof, a vacation, a wedding—these are all examples of expenses you don’t plan to pay for regularly.
Typically, you can get this information from bank statements, credit card statements, and other receipts and bills. Take a look at what you spend now, then deduct expenses that you won’t have at retirement (perhaps a car payment or mortgage will be paid off by then). Knowing this information can bring you to the next step.
Step 2: Estimate Retirement Income
Take a 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. What does your monthly retirement income look like?
Step 3: Compare Expected Expenses to Expected Income
This is just math: In an ideal world, the expected income will be a larger number then the expected expenses. While this is just a ballpark, if the expected expenses are far greater than expected income, now is the time to consider areas that can be easily cut back.
Step 4: Find Ways to Adjust If Needed
There are two ways to reconcile expected retirement expenses with expected retirement income: Either reduce expenses, or increase income.
Is downsizing a possibility? What about going from two cars to one? Perhaps streamlining entertainment expenses? There are dozens of ways to cut back on a budget.
On the other hand, saving can also be helpful in bringing anticipated retirement costs and retirement income into balance.
Step 5: Start Contributing to a Retirement Account
Some people may already be investing in their company-sponsored 401k plan or a similar retirement plan. But individuals can also open a individual retirement account like an Traditional IRA or Roth IRA, to add to their retirement savings.
It may seem obvious that it’s better to start saving early, because people deposit more money into their retirement accounts if they start at a younger age. But there’s more to it than that. Don’t forget about the magic of compound interest.
By compounding, people’s interest earns more interest. Let’s say Gina places an initial deposit of $1,000 into her IRA, then adds $100 each month for a year. She has $2,200, right?
Not so fast. Gina may have contributed only $2,200 to her IRA, but if her account earns an average rate of 8% compounded annually, she has actually saved $2,280 after one year.
After five years of keeping this up, Gina has contributed $7,000 to her account, but saved $8,509.25. After a decade, she has contributed $13,000 but saved $19.452.80. Compound interest can make a huge difference. If Gina invests her retirement savings in stocks, bonds, and funds, her money could earn her even more money.
So why wait? When members open an investment account with SoFi, they have the ability to save for retirement by investing. They can invest in stocks, exchange-traded funds, cryptocurrency, and fractional shares if they only want to buy part of a stock.
SoFi members also have access to SoFi Financial Planners who can provide personalized insights and financial advice and make the most of their retirement savings.
Then they might be able to afford that flight to Western Europe—and weekly cookie-baking parties with the grandkids, of course.
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