Do you think you will spend less in retirement? Many expect to. But expectations can differ from reality. This week, we’ll review some of the expenses that can change in retirement. After reading, you will have some insights into whether you will spend less in retirement – or more.
Retirement represents a time of new beginnings. A time marked by newfound freedom and opportunities for leisure, exploration, and personal growth. While many look forward to leaving behind the daily grind of the working world, it’s essential to recognize that retirement brings about its own set of financial concerns. In this blog, we’ll delve into some of the costs retirees may encounter or find increased in retirement compared to their working years. We hope to give you an idea of whether you will spend less in retirement. We will also explore the financial freedom associated with shedding certain expenses – or costs – in retirement.
First, let’s discuss the costs that can decline in retirement.
Ways You Can Spend Less in Retirement
1. Work-Related Costs
The transition from working life to retirement frees you from various work-related expenses. These can include:
- Commuting costs: You can say goodbye to expenses associated with getting to your office every day. This can result in some or all of the following: fuel costs, public transportation fares, and parking fees. Your car should experience less wear and tear, too.
- Work attire: Maintaining a professional wardrobe can be costly. In retirement, you can retire your suits, heels, and business casual attire. Instead, you can wear more comfortable and casual clothing. For some, retirement can lead to lower dry-cleaning bills as well.
- Dining out: No more lunches with colleagues, client meetings, and after-work socializing to worry about. These can all contribute to significant spending on dining out. In retirement, you have more time to prepare meals at home and enjoy leisurely lunches without the added expense.
A decline in these expenses can help you spend less in retirement.
2. Retirement Savings Contributions
While retirement savings do not represent an expense, if you prioritized savings enough during your working years to allow you to live your desired lifestyle in retirement, they still represent a significant portion of your monthly cash outlays. In retirement, you no longer need to allocate a portion of your income to retirement contributions. Instead, you will start drawing from those savings.
3. Childcare Expenses
Your grown children may already be “off the payroll.” If that hasn’t happened yet, your retirement might also coincide with the end of financial support for your dependents. Childcare costs, including babysitters, daycare, and extracurricular activities can add up. As your children become financially independent or reach adulthood, you can reallocate funds previously set aside for childcare to other areas of your budget. Stopping these payments helps you spend less in retirement.
4. Mortgage Payments
Many retirees enter retirement with their mortgages fully paid off or significantly reduced. Eliminating this major monthly expense provides retirees with a meaningful financial advantage. Without the burden of mortgage payments, retirees can allocate more disposable income toward their preferred lifestyle, travel, or hobbies.
5. Taxes
Retirement can also lead to changes in tax obligations. The tax rules and how they affect you change when you retire. Although retirees are still subject to certain taxes, such as income tax on withdrawals from retirement accounts and investment gains in taxable accounts, they may enjoy tax advantages in other areas. For example, some or all of your Social Security benefits may be tax-exempt. Retirees may also benefit from lower income tax rates if their overall income falls in retirement.
When thinking about taxes in retirement, remember that what you pay in any year matters much less than what you pay over your lifetime. Tax planning can help you lower your lifetime tax bill. If you accumulate significant amounts of tax-deferred retirement savings and don’t consider tax-efficient withdrawal strategies, you could pay more in taxes during retirement than you did while you were working. (See here and here for more on your retirement tax bill.)
6. Home Maintenance
If you downsize in retirement, you will likely have less home to take care of and a smaller yard. You might move into a community where such services are provided on a community basis. This can also help you reduce – or at least help stabilize – how much money you spend on home maintenance in retirement.
Now that we’ve looked at some ways you can spend less in retirement, let’s review some ways you may spend more money in retirement.
Ways You Can Spend More Money in Retirement
1. Healthcare Costs
When it comes to retirement spending, healthcare costs represent a good starting point. Why? Healthcare costs represent one of the most significant expenses retirees face. Healthcare costs also represent one of the biggest misconceptions about retirement spending. Many assume healthcare expenses will fall in retirement. In reality, healthcare costs tend to rise as people age. With advancing age, the need for medical care, prescription drugs, and long-term care often increases.
According to Fidelity Investments, a 65-year-old couple retiring in 2023 should expect to spend an estimated $315,000 on healthcare throughout retirement. Research also cited by Fidelity shows many Americans consistently underestimate just how much they may spend on health care in retirement. A 2022 survey cited by Fidelity found couples expect to spend just $41,000 on health care once they retire. That falls far below Fidelity’s estimate.
Many retirees are Medicare-eligible, which provides coverage for hospitalization and medical services, but Medicare doesn’t cover all healthcare costs. Retiree budgets must include estimated costs for premiums, deductibles, copayments, and expenses related to vision, dental, and prescription drugs. Additionally, long-term care costs such as assisted living or nursing home care, can be substantial. Careful planning for such costs is often necessary.
2. Entertainment and Leisure
When we work with clients on their life plans, It’s surprising when they fail to mention wanting to travel more in retirement. Retirement leaves us with more free time. That often means more opportunities for travel and leisure activities. When we’re working, we don’t always have time to take extended vacations. While travel can be enriching and fulfilling, it also carries with it expenses such as transportation, accommodation, dining, and entertainment. Retirees often spend more time exploring new destinations, pursuing hobbies, joining clubs or organizations, and attending cultural events.
Pursuing passions such as arts or sports can all contribute to maintaining or even increasing spending in retirement. While I do play disc rather than conventional golf because that’s what my kids enjoy the most, I recognize that for many retirement provides additional opportunities to play 18 holes.
Travel and leisure experiences can enhance retirement enjoyment. They also require careful budgeting to ensure financial sustainability.
3. Home Maintenance and Renovations
As you age, maintaining and modifying your home to accommodate changing needs becomes increasingly important. Home maintenance costs such as repairs and renovations can add up over time. If your mobility changes, you may also need to invest in accessibility modifications, such as installing ramps, grab bars, or stairlifts to ensure your home remains safe and comfortable. Such changes can allow you to remain safe and comfortable and allow you to age in place. (Aging in place is another common desire of most clients I speak with.) Factoring these expenses into your retirement budget may allow you to avoid unexpected financial strain.
4. Supporting Family Members
Some retirees may no longer have dependents. Others may financially support adult children, grandchildren, or aging parents. Whether helping with college tuition, helping with a downpayment on a home, or providing caregiving assistance, supporting family members can impact retirees’ financial plans. Considering these obligations and budgeting accordingly can help retirees meet their needs while supporting loved ones.
5. Inflation
Inflation erodes purchasing power over time, meaning the same amount of money will buy less in the future. While inflation rates may seem modest in any given year, your retirement can span decades. Its cumulative effect can be significant.
Retirees need to consider how inflation will impact their expenses over time. While some costs may remain relatively stable, others, such as housing, healthcare, and food, are prone to inflationary pressures. Therefore, maintaining the same standard of living in retirement may require increased spending to offset the effects of inflation. For example, this article highlights the 37% increase in grocery prices over the last five years.
6. Longevity Risk
Due to longer life expectancies, many retirees risk outliving their savings. Planning for a potentially long retirement requires careful consideration of expenses over an extended time horizon. Retirees should make sure their retirement savings and income, such as pensions, Social Security, and investments provide enough to live their desired lifestyle throughout retirement. Implementing withdrawal strategies and asset allocation can help mitigate longevity risk.
You also want to consider that for many retirees, healthcare expenses represent a significant line item in their budget. As medical advances lead to longer life expectancies, the likelihood of needing costly medical interventions later in life also increases. Therefore, it’s essential to budget for healthcare expenses and anticipate potential increases over time.
Closing Thoughts – Will You Spend Less in Retirement?
Many think of retirement as a time of frugality, where individuals tighten their belts and spend less to make their savings last. However, the reality is not always so straightforward. Contrary to popular belief, many retirees maintain or even increase their spending post-retirement. While some costs fall others rise, leading to higher spending during retirement. By acknowledging these realities and planning accordingly, retirees can better manage their finances and enjoy a fulfilling retirement without undue financial strain. Remember, retirement should be a time to live comfortably and pursue passions, not a period of austerity.
As a general rule, consider that your spending in retirement will be a minimum of 80% and a maximum of 120% of what you spent while you were working. Yes, that’s a wide range. Many spend similar amounts in both phases of life. Where you fall within that range depends on your vision of your most fulfilled life and matching your spending with what matters to you most.
If you would like help determining whether you will spend less in retirement – or more – please contact us. We would be happy to help. We can also talk to you about creating your retirement paycheck.
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For firm disclosures, see here: https://apprisewealth.com/disclosures/
Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.
