Mar 31, 2022

How Much do People Spend on Retirement Each Year?

Manny Cominsky

Your retirement should be one of the most exciting parts of your life: after years of hard work you’re finally ready to move on to doing only those things you love with your time, whether that’s traveling the globe or getting your golf score down to record levels. In order to make the most of your retirement, it’s important to make sure that you have plenty of funds saved up so that you can enjoy your retirement to the fullest. 

While many people are familiar with the first half of this equation - saving up money throughout the years - people are often surprised to find out how much they can expect to actually spend in retirement. To avoid any surprises, and to make sure that you’re aiming towards the right retirement goal, it’s important to also gain a grasp of the second half of the question - how much money you spend during your retirement. Knowing what you’ll need to maintain your lifestyle in retirement will help make sure that your retirement savings budget is on track. While you should consult a financial professional before making any retirement planning decisions, the below should give you an outline of the major expenses and costs associated with retirement.

Retirement Costs Per Year

Because each person has a different standard of living, ranging from how expensive their hobbies are to the kind of home they want to live in, it’s impossible to definitively state exactly how much money you’ll need for your retirement without knowing more about your personal lifestyle. Because the circumstances for each retirement are different for each person, it’s often helpful to think not in terms of absolute dollar figures but rather in terms of maintaining your pre-retirement standard of living. Because individuals often spend less money during their retirement than before it (the only category they generally spend more on is healthcare), oftentimes it will require less than your current income to maintain your current lifestyle.

A report by Fidelity, a wealth management service, states that for many people to maintain their pre-retirement standard of living in their retirement years, they should plan to spend roughly 80% of their pre-retirement income per year in retirement. In other words, if you currently make $50,000 a year in income, then to maintain the same quality of life in retirement you should expect to spend roughly $40,000 dollars a year on your retirement.

As we’ve noted above, this 80% figure is only a rough benchmark for what you’ll need in retirement and will of course change depending on the activities you choose to pursue in your retirement. You probably don’t need us to tell you that a retirement largely spent working in the garden will probably cost a lot less than a retirement spent vacationing around Europe.

Another factor that will affect the amount you need for retirement is the amount that you were making before you retired. While this may seem obvious, it’s an important fact to keep in mind as you plan for your retirement. As Fidelity’s report lays out, an individual making $50,000 dollars will probably need to still spend roughly 80% of their pre-retirement income to maintain their retirement expenses. However, if you were to be making $200,000 before retirement you may only need 55% of your pre-retirement income to fund a retirement lifestyle costing $110,000 per year. Thinking in terms of how much you expect your spending to change between your working and retirement years is a good method to frame how much to save for retirement.

Biggest Retirement Expenses

So why do people generally need a lower yearly income after they retire? This is because people generally tend to spend less money as they age, and in particular after retirement. The costs that people face in retirement can generally be lumped into three buckets, the first two of which (household spending and housing costs) go down in retirement while the final bucket of costs (healthcare) generally goes up.

While we know this to be true anecdotally – we see many people saving money in retirement by doing things like downsizing their homes or no longer taking primary responsibility for raising children – we can also see this trend in consumer expenditures data provided by the Bureau of Labor Statistics.

First is household spending on food, entertainment, and transportation costs. Household spending dips slightly as people age, particularly after the age of 55. This makes intuitive sense as people generally spend less time going out when they are no longer working, and subsequently spend less money on things like commuting or eating out at restaurants. However, these costs do not drop off completely as one ages. Take transportation - while many people save money on transportation costs by no longer commuting, retired individuals will still have some need for a car especially if they live outside of a major city and are therefore away from public transportation.

While household spending tends to dip a little bit after retirement, it’s housing costs where retirement spending generally drops the most. This is due to the fact that many people choose to move to a more affordable housing option after retiring, which can take several forms such as moving to a smaller house (downsizing) or moving to a cheaper part of the country (or both!).

Finally, while household spending and housing costs generally dip after retirement, healthcare costs generally increase after retirement. While these costs are unfortunately sometimes hard to predict, it is wise to expect to spend a significant amount of money on healthcare as you age. Fidelity, for example, estimates that a retired 65-year-old couple will spend roughly $300,000 on healthcare over the course of their retirement. Alternatively, Fidelity suggests that an individual should plan to spend roughly 15% of their yearly retirement income on healthcare related expenses. 

One of the best ways to ensure that you are setting up a proper budget for your retirement is to first try and get a sense of how much money you will be spending each year during your retirement. While this number will change for many people based not only on their retirement plans but also on their pre-retirement income, many financial planners use the rule of thumb that you will spend roughly 55-80% of your pre-retirement income each year in retirement if you’re looking to maintain a roughly similar quality of life to the one you had before retirement. That being said, each situation is different and we suggest that before making any retirement decisions you speak with your own financial professional.

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