Will your expenses really decrease in retirement?


How will your expenses really change in retirement? This is a question of crucial concern to many retirees, who are looking at significant shortfalls in savings needed to maintain their current lifestyles. Some articles point out that many of your expenses will decrease or disappear completely in retirement, and therefore you can live comfortably on less than you think.

But it’s tough to make predictions, especially about the future, as Yogi Berra supposedly said. The Bureau of Labor Statistics recently released a report about spending by current retirees. While their situations are different from yours, this information can provide some insight into what your own experience might be.

Experience of current retirees shows that several major categories of expenses do decline after retirement. Transportation is a large portion of expenses for most typical U.S. households, constituting 28% of all expenditures. Commuting to work, school, and after-school activities eats up a lot of a household’s income. When you’re retired and the kids are on their own, this cost vanishes. Transportation costs per person in 2014 were $9,073 on average, but $8,338 for those age 65-74 and $5,071 for those age 75 and over.

Another spending area that drops significantly is contributions to pensions and Social Security: once in retirement you’re more likely to be collecting than contributing. Pension and Social Security costs per person in 2014 were $5,399 on average, but $2,788 for those age 65-74 and $800 for those age 75 and over.

Housing remains the largest cost for most retirees, as it is for most Americans. In 2014, average housing costs per person were $17,798; for those age 65-74 it was $15,838 and for people age 75 and over it was $13,375. Although many retirees no longer have mortgages, other home-related costs continue, such as maintenance and property taxes. Additionally, as retirees age, they often have to hire people to perform tasks they used to be able to do themselves, such as yard maintenance.

Spending on food and clothing remained relatively steady through the earlier years of retirement. Average costs for food in 2014 were $6,759 per person. For those age 65-74 the cost was $6,303 and for age 75 and over the cost fell to $4,349. For clothing, average costs were $1,786 per person in 2014, while for people age 65-74 they were $1,417 and $683 for those age 75 and over.

Healthcare costs are a big concern for many retirees. In fact, though, healthcare expenses did not rise that much on average. For the total population, healthcare costs were $4,290 per person in 2014. For people age 65-74 this rose to $5,956 and for those age 75 and over it actually decreased slightly to $5,708.

When you add in other expenditures like entertainment, personal care products and services, education, and insurance, total expenses decrease somewhat in the early years of retirement and drop much more in later years. Total annual expenditures were $53,495 per person on average in 2014. For seniors age 65-74, total spending was $48,885 and for people age 75 and over it was $36,673.

This finding of an overall decline in spending after retirement is supported by other studies. Morningstar head of research David Blanchett issued a working paper in 2013 which found that overall spending decreases in real terms starting from age 60 on. Spending reaches its lowest level around age 75. It then increases up to age 90 (presumably because of healthcare costs), but still remains below the pre-retirement level.

These studies indicate that most retirees tend to lower their discretionary spending on entertainment, dining out, and travel, and this results in lower overall spending. Healthcare and long-term care are largely unpredictable, but by purchasing Medicare Advantage or Medigap policies and long-term care insurance, retirees can account financially for these contingencies. Additionally, by practicing good health habits, you can reduce the risk of needing expensive services later.

Concerned about planning for healthcare in retirement? This video gives some tips.

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