Will you really spend less in retirement?

So many people think that they will cut spending in half as soon as they retire, but is that really true? Today, we’ll take a look at spending trends for retirees and if they line up with your expectations.

How much do retirees spend?

The Bureau of Labor and Statistics’ most recent data shows that someone between 58 and 76 is expected to spend around $59,131 annually.1

I’ve found that most women don’t spend equally every year in retirement. It’s common to see an increase in spending for the first five or so years into retirement. As things start to slow down, that spending tapers off. But then, for some, things like long-term care or healthcare costs create an increase in spending once again as they age.   

Everyone’s retirement looks a little different, but most of my clients expect to spend about the same in retirement as they did during their working years. To make sure you don’t have to take a “pay cut” in retirement, it’s important to be aware of areas where you may be spending more or less in the coming years.

3 areas where you may spend less

There are a couple of expenses that you can expect to be lower in retirement, including your housing costs, insurance coverages, and taxes.

1. Housing

If you’ve lived in your family home for a while, you’ve likely either already paid off or are close to paying off your mortgage. Some women find it advantageous to downsize in retirement to achieve a more modest monthly payment (or no monthly payment at all). With your children grown and your working years behind you, there’s not always a need for a large home with extra bedrooms or office spaces.

2. Insurance

Some types of coverage are necessary for those still dependent on a paycheck or caring for children. But once you’re financially independent and your children have moved away, you might not have to maintain policies like disability, personal liability, or life insurance. 

In most cases, the money spent on coverages like these could be better spent elsewhere.

3. Taxes

Taxes play an essential role in your retirement plan. But there are many opportunities for women to make tax-efficient decisions about their money in retirement.

These include:

  • Preparing for required minimum distributions (RMDs)
  • Deducting charitable giving
  • Optimizing your withdrawal plan
  • Strategically realizing capital gains

When not adequately planned for, taxes are often the biggest threat to your wealth. That’s why I work with my clients to make tax-minded decisions in retirement.

3 areas where you’ll likely spend more

Without work in the way, you can expect to spend more money on a couple of areas in retirement.

1. Travel

Travel gets put on the backburner during your working years thanks to limited paid time off, school schedules, work commitments, house repairs, etc. 

But according to recent data, retirees spend around $11,000 a year on travel in retirement.2 This comes as no surprise, considering travel is often one of the most important goals women have when planning their retirement. With fewer commitments from work and family, you may find yourself freed up to buy a ticket and see the sights you’ve always wanted to visit.

2. Entertainment

Similar to traveling, people want to do fun things with their free time in retirement. Whether upgrading your cable package or joining a country club, you can expect to spend more money on hobbies and entertainment. 

Now’s the time to get involved with the things you always wanted to do during your working years but never had the time to. A monthly membership to a yoga studio, season tickets to the theater—this is your time to do what you want with your flexible schedule and financial freedom.

3. Health

Unfortunately, your healthcare costs are expected to increase as you age. As a general rule of thumb, set aside about 15% of your monthly budget to cover health expenses.

In retirement, the last thing you want is to be stuck with an exorbitant medical bill. Worse yet, you never want to find yourself in need of care and unable to afford it. That’s why you’ll want to incorporate healthcare planning into your greater retirement plan. 

Start thinking about things like long-term care coverage, maxing out your HSA contributions, and selecting the right Medicare coverage to meet your needs.

Let your desired lifestyle guide your retirement number

How you want to live your life dictates how much you can expect to spend in retirement. If you want to maintain a similar lifestyle, odds are you’ll need to spend about the same in your golden years. 

I urge you to take a good look at what you’re spending now. You may be surprised by how high that number actually is. You could make an active effort to spend less, but that’s not always a realistic expectation.

As you consider how much you’ll need to spend in retirement, the best thing to do is save intentionally. The earlier you start planning, the more likely you’ll be able to achieve your spending goals in retirement.

Don’t hesitate to reach out. I’m happy to help you establish and work toward your lifestyle goals for retirement. 


Sources:

  1. Consumer expenditures in 2020 
  2. How to Estimate Retirement Expenses