How Much Will You Spend in Retirement?

The most thoughtful older adults take their time and carefully estimate their retirement expenses well in advance of living out their retirement. This makes perfect sense because, now that you’re not working, you’ll need to make sure your retirement funds can cover those costs without stress. Let’s examine some typical monthly retirement expenses and, more importantly, how having the ideal living arrangement can help to reduce them, whether you’re planning to retire soon or are already retired and want to stretch your money even further.

A Comprehensive Guide to Estimating Your Retirement Budget

Retirement is a time for relaxation, adventure, and pursuing passions. But to truly enjoy this stage of life, you need a solid financial plan. A crucial part of that plan is understanding your retirement expenses and creating a realistic budget.

This guide will help you estimate your retirement budget, taking into account various factors that influence your spending. We’ll explore key considerations, provide practical tips, and offer insights on how to adjust your budget based on your lifestyle choices.

Key Takeaways:

Expect to spend 55%–80% of your current income annually in retirement.
An active retirement lifestyle may increase your budget by 6 percentage points.
Healthcare expenses are estimated to consume 15% of your retirement budget.
Working with a financial advisor can help fine-tune your budget and retirement income plan.

Estimating Retirement Expenses:

Determining how much you’ll spend in retirement can be challenging. However, by considering these key factors, you can create a more accurate estimate:

Pre-retirement income: The 80% rule suggests you’ll spend 80% of your pre-retirement income annually in retirement. This provides a starting point for budgeting.
Lifestyle choices: An active lifestyle with travel and new activities will require a higher budget than a more relaxed retirement.
Health expectations: Healthcare costs are a significant expense in retirement. Plan for 15% of your budget to cover these costs.
Housing costs: Many retirees downsize or relocate, leading to lower housing costs.
Taxes: Taxes can impact your retirement income. Factor them into your budget.

Creating Your Retirement Budget:

Once you have a good understanding of your potential expenses, you can start building your retirement budget. Here are some steps to follow:

Gather your financial information: Collect data on your income, assets, and estimated expenses.
Use budgeting tools: Utilize online calculators or spreadsheets to track your spending and estimate your retirement needs.
Consider unexpected costs: Factor in potential expenses like home repairs or medical emergencies.
Adjust for inflation: Account for inflation’s impact on your future expenses.
Seek professional guidance: Consult a financial advisor for personalized advice and budget optimization.

Adjusting Your Budget for Different Lifestyles:

Your retirement lifestyle choices significantly impact your budget. Here’s how different lifestyles affect your spending:

Active lifestyle: Expect a 6% increase in your budget compared to a less active lifestyle.
Minimalist lifestyle: Your budget may be significantly lower if you choose a simple and frugal lifestyle.
Travel-focused lifestyle: Frequent travel can significantly increase your budget.

Questions to Discuss with Your Advisor:

As you approach retirement, consider discussing these questions with your financial advisor:

Should I pay off my mortgage before retirement?
How will my grandchildren’s college expenses impact my budget?
Do I need to adjust my budget for extensive travel plans?
Are there relocation plans that could affect my expenses?
How will health issues or taxes impact my retirement planning?
Do I have a housing strategy for different stages of retirement?

By understanding your retirement expenses and creating a realistic budget, you can approach this new chapter with confidence and financial security. Remember, your budget is not static and can be adjusted as your needs and circumstances change.

Additional Resources:

Fidelity Viewpoints®: Timely news and insights from Fidelity experts on markets, investing, and personal finance.
Fidelity Retirement Planning: Comprehensive resources and tools to help you plan for a successful retirement.
Fidelity Financial Solutions: Personalized guidance and support for your retirement planning journey.

By leveraging these resources and actively engaging in retirement planning, you can ensure a financially secure and fulfilling retirement.

Managing Expenses by Moving to a Retirement Community

Calculating your typical monthly retirement expenses is only the first step; controlling those costs is a completely different matter. While there exist numerous strategies to cut costs on an individual basis, relocating to a retirement community is one surefire way to address all of them at once.

To be more precise, relocating to a continuing care retirement community (CCRC) assists you in handling almost all of the expenses you will incur in retirement.

This might sound hard to believe, but it’s quite true. Let’s examine each of the above-mentioned costs and see how being a resident of a CCRC helps manage them.

Relocating to a retirement community helps you keep housing costs under control because you won’t have to worry about things like property taxes. Furthermore, regular costs for maintenance, landscaping, and repairs are combined into a single monthly payment, which is frequently less expensive than paying these expenses separately, particularly in the event of an emergency like the need for a new roof or water heater.
One of the best reasons to move into a CCRC is to reduce healthcare costs because these communities can provide long-term care regardless of how it changes over time. Furthermore, the cost of that care won’t fluctuate over the course of your stay with what is commonly referred to as a Type A long-term care contract, minimizing the chance that your medical expenses will rise over time.
Living in a retirement community reduces transportation expenses because many CCRCs provide support and transportation options. This can include visits to nearby medical facilities as well as malls and other attractions. This can lessen your need for a personal vehicle overall and the costs associated with it. Furthermore, a lot of the things you might want to travel for are available on campus, including a fitness center, a swimming pool, walking trails, woodworking shops, performance centers, and more.
Living in a retirement community can also reduce your costs for entertainment and food. A vast range of amenities are available at CCRCs, giving you the chance to fully enjoy your retirement. On-campus dining options, on the other hand, assist you in managing your food expenses by giving you affordable substitutes for eating out while maintaining the quality of fine dining.

Estimating the Average Retirement Expenses in a Year

Even though retired people usually have fewer expenses than they did when they were working—fewer commuting costs, for example, plus disability insurance premiums and other costs associated with working—the simple act of comfortably residing comes with a number of expenses.

In fact, the U.S. Bureau of Labor Statistics states that in 2021, the average retiree household spends around $50,000 a year in living expenses. Interestingly, this compares favorably to the average for all households in the United States, which stood closer to $63,000, but it’s still a substantial figure. Let’s break down the biggest expenses in retirement.

Starting off with one the biggest expenses in retirement. Housing costs accumulate because they take into account not only the mortgage or rent, but also the payment of property taxes, homeowner’s or renter’s insurance premiums, and any costs associated with upkeep or repairs for the home. In addition, you have to pay for utilities since you’ll need heat, electricity, and other costs for things like landscaping, trash collection, and TV, phone, and internet. Put another way, even with a paid-off house, one of your biggest expenses is still housing. Thus, be sure to include everything in your budget.

Healthcare comes in second place and is equally important as housing. Major costs include health insurance, paying for medical services and supplies, and filling prescriptions. Because older adults frequently depend on high-quality medical care to stay well into retirement, these costs become crucial. Medicare covers some of these costs, but not all. Your monthly costs will soar if you ever require long-term care, so it’s best to budget for this well in advance.

People who are retired for an extended period of time typically see a decrease in their transportation expenses. This is particularly valid for those who travel long distances for work. However, this expense does not go away completely; you will still be responsible for paying for any costs associated with using your own car. This covers maintenance, registration fees, gas and insurance, and payments for auto loans or leases. Your projected retirement expenses will also include the cost of public transportation even if you do not own a personal vehicle. Simply put, you won’t be paying as much as you did to travel to your job!

Of course, travel is another cost related to transportation, and that may rise in the future. The only thing stopping you from taking vacations wherever you choose now that you are retired is making sure you have budgeted for them.

Food expenses can also add up when you eat out and cook your own meals. Considering that you still need to eat even if you’re not working, this is the one expense that might not change significantly in retirement.

Nevertheless, you can decide you want to go out to eat more, perhaps even just for breakfast at your favorite neighborhood diner. Additionally, you’ll have more time to engage in more enjoyable activities, such as watching more movies, visiting the city more frequently for events or museums, engaging in your preferred pastimes, or doing anything else you want to do. As a result, setting aside money for entertainment in your budget is a smart idea.

Retirement Budget – Retirement Budget Planning

FAQ

What is a typical retirement budget?

According to the Bureau of Labor Statistics (BLS), the average income of someone 65 and older in 2021 was $55,335, and the average expenses were $52,141, or $4,345 per month.

What is a decent amount of money to retire on?

10x your annual salary by 67 To fund an “above average” retirement lifestyle—where you spend 55% of your preretirement income—Fidelity recommends having 12 times your income saved at age 67, which is the normal Social Security retirement age.

What is a good monthly retirement income?

Many retirees fall far short of that amount, but their savings may be supplemented with other forms of income. According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.

Is $500 K enough for retirement?

Most people in the U.S. retire with less than $1 million. $500,000 is a healthy nest egg to supplement Social Security and other income sources. Assuming a 4% withdrawal rate, $500,000 could provide $20,000/year of inflation-adjusted income. The 4% “rule” is oversimplified, and you will likely spend differently.

What are common budget considerations in retirement?

Common budget considerations in retirement include housing, health care, entertainment, taxes, debt, travel and hobbies, home modifications, family support, and inflation. Some expenses change in retirement. While transportation and housing costs often drop, health care and entertainment may go up.

Should you budget for retirement?

Budgeting ahead of retirement will help reduce stress later in life. You’ll find that some expenses can be reduced or eliminated, while others may even increase as you age. Here are 10 costs to include as you budget for retirement: Housing. Health care. Daily living. Entertainment. Taxes. Debt. Travel and hobbies. Home modifications.

What is a good retirement budget?

The answer isn’t always obvious. “Often it is suggested that a retiree take their pre-retirement income and estimate 70% to 80% as a good retirement budget,” Steinke says. If you’re still working and your salary is $100,000 a year, you might estimate that you will need $70,000 to $80,000 annually in retirement as a starting point.

How do you calculate a retirement budget?

Bills for property taxes, insurance premiums, auto registration, and home warranties may arrive once a year. Add up these periodic expenses and divide by 12 to calculate their monthly cost to include in your retirement budget. Use lined paper or a computer spreadsheet program to account for the timing of expenses.