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Typical Retirement Expenses to Prepare For

July 07, 2021 · 6 minute read

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Typical Retirement Expenses to Prepare For

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 when it comes to cost of living during their retirement years, and they may not know how to budget for typical expenses in retirement like housing and transportation. It can be difficult to transition from a saving mindset to spending, once you’ve stopped working.

Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend, how much they need to save for retirement, and figure out when they can retire.

Average Retirement Expenses

Americans aged 65 and older spend an average of $48,106 per year, or $4,008.83 per month, according to the Bureau of Labor Statistics. More specifically, those aged 65 to 74 spend $52,928 annually, while spending drops for people aged 75 and older spend to $41,471 annually.

Retirees typically spend less than the American average, which is $61,749 per year, or $5,145.75 per month. Retirees even tend to spend less than people nearing retirement aged 55 to 64, who spend $66,139. The typical budget for a retirement couple needs to cover that amount every year for a retirement that could stretch over two or three decades.

Recommended: Average Retirement Savings by Age

Drilling down to specific categories can help retirement savers determine benchmarks for their own budget.

Housing and Living Expenses

Housing and living expenses, such mortgage payments, insurance, and maintenance costs, are typically among the highest costs retirees will face.

In 2021, Americans aged 65 and older spent an average of $4,847 annually on housing-related costs, including property tax, maintenance, repairs, insurance and other expenses. On average, utilities, fuel and public services cost an additional $3,743, and miscellaneous costs related to household operations were another $1,219. Renters spent an average of $2,471 per year on their dwellings.

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 cooler real estate market in a state with relatively low property taxes, such as Wyoming, South Carolina, or Colorado.

Transportation

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 major factor in retirement expenses, especially early in retirement.

Americans spend an average of $10,160 per year getting from point A to point B, but retirees spend a little less. Those over age 65 spend an average of $6,618 annually on transportation, or $551.50 per month. People aged 65 to 74 spend $7,851 per year, and people 75 and older spend $4,963 per year. These numbers cover everything from buying a car to filling up the gas tank to purchasing a bus pass, 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, taxis, and trains cost older generations an average of $441 per year.

Healthcare

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. On average, Americans spend $5,204 on healthcare per year, but this is one area where retirees spend more than their younger peers.

People over age 65 spend an average of $6,719 per year, or $559.91 per month, on healthcare. Those aged 65 to 74 pay $6,792, and people aged 75 and older spend slightly less—$6,619.

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 specifically cover healthcare costs.

Food

People over age 65 spend $6,303 annually, or $525.25 monthly, buying food. Those aged 65 to 74 spend $6,992 per year, and those over 75 spend $5,294. This includes both food at home and at restaurants and fast food chains.

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.

Entertainment

Having fun isn’t just for the young. People over 65 spend an average of $2,282 annually on entertainment, or $191.16 monthly, on fees and admissions to places like museums, theater performances and movies. Entertainment expenses also include hobbies and food and toys for pets.

People aged 65 to 74 spend $2,556 per year. Once they hit age 75, however, the amount they spend on entertainment drops to $1,889, perhaps as mobility decreases.

4 Steps to Set Up a Retirement Budget

Once you’ve got an idea of what your retirement expenses will look like, you can start to save and budget for them in a comprehensive way. Since every retirement looks different, there is no average retirement budget, but these are the steps to create a budget that works for you.

Here are some easy steps to take to get a head start on your retirement budget, so that you know how much you need to save.

Step 1: Make a List of Expected Monthly Expenses

Most expenses can fit into one of three categories: fixed, variable, and one-time. Fixed expenses are things like mortgage/rent, property taxes, and your car payment.

Others, like 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.

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 some money aside for unexpected emergencies (like that new roof), and have other funds earmarked for non-essential, one-time expenses (like a wedding or vacation).

Gather this 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 by then). Tally what’s left to get an estimate of your projected expenses and create a line-item budget.

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. Total them up to figure out what your monthly income will be.

Step 3: Compare Expected Expenses to Expected Income

In an ideal world, your expected income will be a larger number than your expected expenses. 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? On the other hand, increasing the amount you save can be helpful in bringing anticipated retirement costs and retirement income into balance. Or ,you may consider taking on a part-time job when you retire to increase your monthly income.

Step 4: Contribute to a Retirement Account

You may already have retirement savings in your company-sponsored 401k plan or a similar retirement plan. But those who don’t have access to one, or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA.

The earlier you start saving, the better, so you can take advantage of the power of compound interest, the returns you earn on your returns. Let’s say you make an initial investment of $1,000 into your IRA and add an additional $100 each month for a year. At the end of the year, you’d have $2,200, right?

Not so fast. You may have contributed only $2,200 to your IRA, but if your account earns an average rate of 8% compounded annually, you have actually saved $2,280.

Compounding interest grows exponentially. After five years you’ve contributed $7,000 to your account, but saved $8,509.25. After a decade, you’ve contributed $13,000 but saved $19.452.80.

Step 5: Figure Out When You Can Retire

Once you know how much you need, and how long you’ll need to save to get there, you can make a plan for a realistic timeline for when you can actually 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.

The Takeaway

Budgeting for retirement can feel overwhelming, but taking it step by step allows you to create a plan for a retirement you’ll enjoy.

Ready to start saving to cover your retirement expenses? Consider an investment account on the SoFi Invest® Brokerage Platform. Investors can buy stocks, exchange-traded funds, cryptocurrency, and even fractional shares. SoFi members also have access to SoFi Financial Planners who can provide personalized insights and financial advice so members can make the most of their retirement savings.

Learn more about how SoFi Invest can help you save for retirement.


SoFi Invest®
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