Creating a retirement budget is crucial to ensure you do not run out of money in your later years. However, setting up a budget can be challenging because predicting future expenses can be tricky. Life changes after retirement and your financial needs may vary. Many people may also underestimate their retirement expenses, which can lead to a shortfall of funds later. Analyzing past data and understanding the spending habits of other retirees can help you structure your budget.
A financial advisor can help you understand the average monthly spending of a retiree based on past data and what expenses you will have to account for in retirement. This article also aims to provide a realistic view of your future expenses as per some recent surveys and help you plan how much you will need to spend in retirement.
What is the average monthly spending of a retiree?
The average monthly expenditure varies significantly based on individual factors such as age, lifestyle, and health. Your specific needs and preferences will dictate your monthly expenses. Additionally, geographical location will also play a crucial role in determining costs, with larger cities generally being more expensive compared to smaller towns or rural areas. However, getting a general idea of the potential costs can be helpful to plan ahead.
The Employee Benefit Research Institute (EBRI) conducted a comprehensive Spending in Retirement Survey in 2022. This survey revealed diverse spending patterns among retirees in the country. Approximately half of the retirees (48%) reported spending less than $2,000 each month. Meanwhile, 33% indicated their monthly expenses ranged between $2,000 and $3,999. 16% of retirees spent between $4,000 and $6,999, with a smaller fraction of only 3% exceeding $7,000 each month. Additionally, in 2022, housing expenses consistently represented the largest portion of retirees' monthly budgets. On average, retirees allocated 30% of their monthly income to housing costs. However, this percentage varied significantly based on the annual household income. Retirees with annual incomes below $30,000 spent approximately 36% of their income on housing, while those earning over $100,000 spent about 26% in 2022.
Other significant expenditures for retirees as per the EBRI survey:
- Food: Retirees spent an average of 26% of their monthly income on food in 2022, making it one of the largest expenses.
- Medical and health insurance: These costs accounted for 12% of retirees' monthly budgets. This was inclusive of money spent on covering insurance premiums and out-of-pocket medical expenses.
- Transportation: Car payments, insurance, gas, and transportation expenses constituted 11% of monthly spending for retirees.
- Entertainment: Retirees allocated 8% of their income to entertainment, which included leisure activities and hobbies.
- Other expenses: Personal needs, such as clothing and miscellaneous costs, made up approximately 12% of monthly expenditures.
- Unexpected costs: Despite careful planning, some retirees encountered unexpected expenses. Around 26% of retirees reported spending more than anticipated on housing and health insurance. Additionally, 20% faced higher-than-expected medical bills.
The survey also highlighted financial readiness among retirees for the long term. Encouragingly, more than half (54%) of the retirees surveyed felt financially prepared to sustain their income needs till the age of 90.
How to plan for your retirement?
Planning for retirement is crucial for securing financial stability and ensuring a comfortable lifestyle in your golden years. Understanding your average monthly expenditures, even though they may differ from survey findings, can provide you with insights for effective retirement planning. The survey highlights key expense areas that are likely to be significant during retirement. Saving adequately for these expenses and others is essential to achieve a secure retirement. Let’s know more about the probable expenses you will have in retirement and how you can save for them:
1. Invest in HSAs and long-term care insurance to meet your healthcare expenses
Healthcare costs represent a significant financial risk during retirement. In fact, healthcare is often ranked among the largest expenses retirees face in their post-working years. As people age, healthcare expenses typically rise, and so does the potential requirement for long-term care. These costs can escalate to the point where you may need to liquidate assets, including your home, to afford necessary medical services, especially long-term care in nursing homes.
A 2023 research report by the EBRI highlights the substantial savings required by retired couples to cover healthcare expenses throughout their retirement years. According to the report, the savings needed to cover healthcare expenses in retirement vary based on factors such as gender and specific health conditions. On average, men should aim to save approximately $184,000 to cover their healthcare needs in retirement. In contrast, women are advised to target savings of around $217,000 due to longer life expectancy and typically higher healthcare costs. The savings requirements can escalate dramatically for retirees facing significant prescription drug costs or other high medical expenses. In such cases, couples may need to accumulate up to $413,000 to have a 90% probability of covering their healthcare expenses throughout retirement.
To effectively prepare for these potential expenses, you must implement various financial planning strategies, such as investing in suitable investments and savings accounts. Health Savings Accounts (HSAs) are particularly beneficial for addressing healthcare costs in retirement. These tax-advantaged accounts are designed specifically for medical expenses and offer triple tax advantages. Your contributions are tax-deductible, your earnings grow tax-free, and all withdrawals for qualified medical expenses are tax-free. Additionally, you must plan for long-term care. You can explore long-term care insurance options to safeguard against potential future needs. It is recommended to purchase long-term care insurance in your 50s or 60s to secure coverage and enjoy relatively lower premium rates.
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2. Offset food inflation costs through investments that offer consistent returns
As highlighted above, food expenses will likely constitute a significant portion of your budget in retirement, with retirees spending an average of 26% of their monthly income on food in 2022. This makes food one of your largest recurring expenses that cannot be easily eliminated or controlled. Managing your food expenses effectively requires regular disposable income, which can be supported by savings vehicles that provide monthly income, such as pension plans, annuities, 401(k)s, and Individual Retirement Accounts (IRAs).
It is crucial to opt for investments that offer returns that beat inflation to combat the impact of food price increases. According to projections from the Economic Research Service of the U.S. Department of Agriculture for 2024, food prices are expected to rise by approximately 2.2% across different food categories. Notably, the cost of food purchased for home consumption is anticipated to go up by approximately 1%, though this could range from 0.4% to 2.5%. On the other hand, prices for dining out, or food consumed away from home, are expected to experience a more significant rise of 4.2%, with an estimated range between 3.6% and 4.8%.
To address the challenge of food inflation, you should consider investments that can effectively preserve and grow your purchasing power over time. You may use strategies like maintaining a diversified portfolio that includes assets known for inflation-beating returns, such as stocks, inflation-protected securities like Treasury Inflation-Protected Securities (TIPS), and Real Estate Investment Trusts (REITs). These investments are designed to provide returns that outpace inflation and can help you maintain your standard of living despite rising food costs. Furthermore, you can benefit from financial products that offer predictable and regular income streams, such as immediate annuities or 401(k)s with Required Minimum Distributions (RMDs) to ensure a steady source of funds that can be specifically earmarked for covering essential expenses like food.
In addition to this, managing your personal food expenses wisely is also important. Cost-effective shopping options, bulk deals, meal preps, discounts, coupons, etc., can help stretch your food budget further and help reduce food costs without compromising your needs.
3. Lower transportation costs by switching to a more fuel-efficient car, using public transportation, and more
Even in retirement, transportation costs remain a significant consideration. These expenses can include more than just fuel or vehicle purchase costs. The average monthly expenses for a retired couple can also include auto insurance, maintenance and repairs, leasing fees, car rental payments, and public transportation fares. Similar to food expenses, transportation costs can also be impacted by inflation over time. Therefore, it is crucial to plan for them wisely. While your regular retirement income may cover day-to-day expenses like fuel and occasional rentals, it is prudent to maintain an emergency reserve for unexpected maintenance and repair costs. These expenses can arise unexpectedly and potentially disrupt your budget if you do not prepare adequately.
You can also consider downsizing or moving to a more cost-effective vehicle. Switching to a more fuel-efficient car with lower maintenance costs can significantly reduce your overall transportation expenses in retirement. If feasible, consider downsizing to one car that both you and your spouse can manage together to further streamline costs. You can also consider exploring Electric Vehicles (EVs) as a cost-effective retirement option. EVs can eliminate fuel costs and may turn out cheaper compared to traditional gasoline-powered vehicles. Moreover, maintenance costs for EVs are often lower, which can help you save money.
You can also explore alternative transportation options such as subways, buses, and rideshares to minimize expenses. Many cities and towns may also offer senior discounts that can further reduce costs and provide convenient mobility options.
4. Maintain a budget to take care of entertainment costs
Entertainment costs in retirement can vary significantly depending on your personal interests and lifestyle preferences. For some individuals, these expenses may be minimal or even negligible, while for others, they can constitute a substantial part of their budget. Achieving a balance is crucial when planning for entertainment costs in retirement.
It is beneficial to maintain a budget specifically allocated for hobbies and social activities. This can help you stay engaged, motivated, and fulfilled during retirement. Engaging in activities that you enjoy can contribute positively to your overall well-being. Interacting with like-minded individuals and forming social connections with friends and family members also play a vital role in retirement. Social engagement not only enhances your quality of life but can also contribute to a long life by reducing stress and lowering the risk of certain health issues.
When budgeting for entertainment expenses, you must consider the cost-of-living standards in your city or region. Factors such as the cost of membership to clubs or other organizations, dining out costs, and transportation expenses should all be considered. This can ensure that your entertainment budget aligns with your desired lifestyle. Additionally, you can explore cost-effective ways to enjoy leisure activities. For example, you can take advantage of senior discounts for cultural events, clubs, etc., and consider group outings or shared experiences with friends and family to reduce individual costs.
5. Create an emergency fund to cover any unexpected costs
Preparing for unexpected expenses is crucial during retirement. Financial emergencies can arise unexpectedly and take various forms, such as home repairs, medical bills, or unexpected financial assistance needed for a child or grandchild. These expenses can quickly deplete your savings and disrupt your financial stability if you are not prepared. It is essential to establish a contingency fund for unexpected costs so you can cover unforeseen expenses without impacting your day-to-day financial needs or long-term savings goals. Setting aside an emergency fund can offer you peace of mind and financial security in retirement. Aim to keep an emergency fund that covers at least three to six months of your essential needs.
To conclude
The amount of money needed to retire comfortably varies widely based on your individual circumstances, including lifestyle preferences, health care needs, and desired retirement activities. While there isn't a one-size-fits-all answer, surveys and financial studies can provide valuable insights into retirement savings goals and strategies. These allow you to set a savings target and develop a retirement plan tailored to your financial goals. Typically, financial experts recommend aiming to replace about 70 to 80% of your pre-retirement income to continue a similar standard of living in retirement. However, your specific needs may vary, so it is essential to assess your own situation carefully. Seeking guidance from a financial advisor is also highly recommended to prepare and plan for your future retirement needs.
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