Retirement Expenses 101: The Largest Expenses Average Retirees Pay and How to Prepare Now

Do you know how much you need to live on in retirement?

Retirement expenditure is a critical factor that should feature in your long-term financial plans, especially in an expensive state like Oregon

To start, you need to first understand your estimated retirement expenses based on your expected lifestyle and other factors. And from this, you can come up with suitable savings and investment plans.

It is important to point out here that one of the best ways to get retirement advice is to hire a fee-only financial advisor in Portland. They are experienced and certified retirement planning consultants who can provide retired couples and individuals with insight into retirement matters.

How Much Do People in the US Usually Spend in Retirement?

For comfortable post-work years, you should save at least 15% of your pre-tax income every year until retirement. 

A 2016 (BLS) Bureau of Labor and Statistics report shows that the average retirement living costs of Americans aged 75 and above is $36,673, and those aged 65 and older spend $48,885 annually. This amount will depend on your money, lifestyle choices, and health status.

According to the same BLS data, the average annual expenditure for households run by persons older than 65 years and above is $49,279, which translates to $4,185 monthly. Also, these expenses in retirement go down with progress in age. 

Additionally, this report shows that for 33.3% of these homeowners, 1/3 of their expenses often go towards housing, making housing a major expense for the retired American. Between $6,066 to $4,349 of the annual household expenditure is on food.

All these figures can quickly add up to huge sums annually. This is why for a comfortable retirement, a couple’s retirement income should be 79% of their earnings before retirement. This is known as the retirement income replacement ratio.

How much does the average retired person live on per month?

The average cost of retirement per month is estimated at $5,049.42, according to one source. These costs can be regular, one-off expenses, or unexpected expenditures. 

This same source places housing as the biggest expenditure for a retiree in the US, averaging $1,406.68 per month between 2016 and 2020. Also, the same source suggests that an average retiree spends $548.62 per month. Generally, expenses in retirement go down as the individual advances from 65 to 74years because, in most cases, they have already paid up their mortgages.

Additionally, surprise costs in retirement, such as uncovered health care, long-term care, children in crisis, and loss of a spouse, may affect the retirement monthly budget. Inflation is another major consideration depending on the time you have before you retire. And experts place inflation rates in the US at 3.8% annually.

What are the Biggest Retirements Costs?

Going by the statistics provided by the US Bureau of Labor and Statistics (BLS), the biggest average expenses in retirement are as follows:

Housing needs for a retiree in America, which could be in the form of mortgage, maintenance, and repairs, averages $17,798 per year.

Transportation costs for a retiree on average are $9,073 per year, while healthcare expenses are estimated at $4,290 per year.

Food is another one of the big expenses for a family with a retired person at $6,759 per year. The average monthly expenses in retirement for food are $563.25.

Expenses That Remain the Same From Month to Month

Some typical costs of a retiree are likely to remain the same, and they include the following:

Housing

Everyone hopes to have paid off their mortgage before they stop working. However, 19% of US retirees still pay for mortgages at 65 and older. 

Depending on status, a pensioner's home budget may include rent, insurance, taxes, and mortgage. And they often amount to 33% of an individual’s annual spending. It is best to plan and pay off mortgages before retirement. If you can’t do that, you should watch your average retirement expenses, do a smart valuation and downsize your home to sidestep your mortgage debt.

Even if you have already paid off your mortgage, you still need to create room for other average house expenses such as taxes, insurance, and maintenance. 

calculate retirement expenses

Sometimes, people prefer to relocate to cheaper homes or less expensive areas to lower their expenditures. You must look at the housing issue from different perspectives to make a sound decision.

Food expenses

Food is an essential expense that should feature in a typical retiree budget. 

A retiree household spends about $1,800 less on food per year than a normal household. Also, seniors spending on eating in restaurants is about 30% of their food budget. 

As you plan your budget, you need to check your style, whether you prefer to dine in home-cooked food and how often you eat out on your own and with friends. By looking at all the options you have, you can plan well, and if you are looking to adopt a cheaper lifestyle, you should consider cooking at home more often.

However, you need to leave room for eating out costs because you now have more time for fun and hanging out with friends. To save on cost, you may also consider shopping at stores and eating at restaurants offering senior discounts.

Transport

The need to travel reduces when you retire. Studies show that normal household expenses for transportation are $10,961 per year, which is $3,801 more than a retired household. 

Nonetheless, retirees still need to move from one location to another for varied reasons. For this reason, you still need to cover vehicle expenses such as gas, insurance, maintenance, and repairs. 

You should consider public transportation costs and car rental if you don’t have or use private transportation. It is often cheaper to get rid of the car and budget for cheaper public transportation or other services such as Uber or Lyft.

Health care and insurance premiums

Health care is one of the biggest expenses in retirement. If you are making post-work years plans, you should consider health-related expenditures such as health insurance premiums, drugs, medical supplies for existing conditions, and other medical services. 

Generally, for elderly persons, at $7,030 annually, medical cost per month is $131.5 less than for the average person in the USA, with most of the expense going towards paying for health insurance.

Finding the best healthcare insurance provider and adequately understanding your Medicare coverage may save you a lot of money. For instance, Medicare has four different sections covering different services. Under parts A and B, also Original Medicare, expenses are paid directly to the provider by the government, and most hospitals and doctors accept Original Medicare.

While most people are not required to pay for Medicare part A, under part B, you may be required to pay $170.10 or more, depending on your income. Part D entails prescription drug plans, and the amount you pay depends on the plan you choose. And delays in signing up could attract additional premium costs in the form of penalties.

You should also understand what is covered and uncovered charges under the long-term care of your insurance. All these allow you to plan a sufficient budget for your post-work years. Also, as your budget, consider certain healthy habits such as physical exercise and diet.

Utilities

The regular utility bills include phone expenses, water, electricity, internet, and gas. It is one of the everyday expenses most households have to cover. The average utility bill of a retiree household is $3,921, which is $302 cheaper than a normal household. 

There are ways to lower utility bill expenditure after retirement, such as applying energy-saving strategies.

Possible Unexpected Expenses

Some costs in retirement are hardly anticipated and mostly left out of the retirement budget breakdown. This is why it is important that you consider the help of Oregon wealth management experts to figure them out and factor them into your budget. 

Without leaving room for these unforeseen expenditures, you are likely to have a deficit when they occur, which might offset your finances. However, if you never get to spend these emergency funds you budgeted, you remain surplus which is always a good thing and can cater to your retirement travel budget later. 

biggest expenses in retirement

Experts advise that you set aside an emergency fund for three to six months of living expenses, including rent.

Some of the unexpected expenses include:

Unplanned home repairs

All homes require certain fixing and maintenance, which might affect the cost of living in retirement depending on the size and nature of your home. 

Damages such as broken pipes and heaters can be costly if you run on a tight budget. It is also likely that you won’t be able to manage some repairs and maintenance chores around your home due to age and low physical strength. And you might have to hire someone to do it for you if you don’t have family around to help. Also, you may need to make certain adjustments to your home to fit your changing needs.

You can always take care of some repairs to your home before post-work years to avoid doing it later on a fixed income. If you are relocating to a new home, you may need an engineer to assess it for possible damages that may break your pockets. Additionally, you should take care of repairs gradually to avoid overstretching your budget.

Healthcare expenses

As you age, you will likely require more medical attention, which your insurance will not always cover. You will also require regular check-ups, which might affect your budget. 

If you have medical insurance, you can preplan the monthly premiums. However, there are certain out-of-pocket medical expenses which you need to factor into your retirement budget planning. 

It isn't easy to plan for these expenses because you can’t predict their actual value. However, it is helpful to choose the appropriate health insurance; even with high premiums, you can plan for them and reduce the risk of unexpected medical expenses.

Relocation expenses

You may have to move out of your home to a new region for various reasons, such as to be close to family or for special medical needs, following a divorce, or eviction. When unplanned, relocation expenses can have a huge impact on your finances. 

Expenses related to relocation are hefty and might include moving charges and deposits, among others. An emergency fund makes you flexible enough to take care of such unexpected expenditures without offsetting your budget.

Taxes

At times, taxes may come unexpectedly. For instance, your income might place you in higher taxation brackets forcing you to pay more taxes than expected. If you have to pay higher monthly or annual taxes, you will need to adjust, calling for a lifestyle change. 

Also, depending on your income, you may have to pay higher taxes on your social security benefits as you grow older. Unknown to many is that income from a qualified annuity is also taxed regardless of whether you bought it with taxed dollars or not.

typical retiree budget

To avoid these unexpected taxes, you should pay off your taxes before retirement, research, and stay informed on any changes in taxation. You should also consult a professional to review your income and ensure all taxes are paid.

Loss of spouse

The death of a spouse can have a significant impact on your finances because of shared costs and incomes. If you depend on each other’s income, you may be left struggling with finances. 

Other one-off costs also come with death, and funeral expenses can significantly affect your budget. The death of a spouse is a natural occurrence that should be planned by purchasing life insurance. This ensures financial stability for the bereaved spouse and family for some time.

How Do You Estimate Your Future Retirement Expenses?

Budgeting for post-work years involves taking into account and planning for the projected expenses through savings and investment plans. 

It is often a step-by-step process whereby you first need to learn how to calculate how much money you need to retire comfortably. 

financial windfall management

Keeping track of your current expenditure and comparing it to your budget can help identify areas needing adjustments. A typical retirement budget varies depending on the time you have before you retire and your current income, savings, and investments. 

To calculate retirement expenses, Roth IRA planning experts suggest that you save 25 times your current annual spending, assuming you will maintain the same lifestyle.

Retirement Budget Calculation Example

Here is a retirement budget example:

  • Assuming you are currently spending $5,000 monthly
  • Multiply the monthly expenditure by 12 to get your annual expenses ($5,000 x 12) = $60,000
  • Then multiply your annual expenses by 25 to get the savings you require for retirement, i.e. ($60,000 x25) = $1.5M

7 Steps to Set Up a Good Retirement Budget

Here are the best practices and hips to help you prepare way ahead of your post-work years:

  1. Depending on your risk tolerance and the time before you retire, you should consider investing in mutual funds, stocks, and bonds. You can adjust your budget and diversify income sources to make room for such investments, but remember to keep it simple.
  2. Consider saving with accounts that provide good returns that are ideal for retirees.
  3. Plan to clear debts such as mortgage before you retire by accelerating payments.
  4. Tabulate your expected post-work years income, including Social Security and pensions, and consider your expected expenses.
  5. Consider where you intend to live and the average cost of living in those areas.
  6.  Postpone your retirement date if necessary to save more.
  7.  Consult a retirement tax planning expert to avoid unexpected taxes

To Sum Up

Planning for retirement is a critical decision you can’t afford to overlook. 

Mistakes in setting up retirement budgets can take a toll on you during your advanced age. This is why it is a good idea to get the assistance of Interactive Wealth Advisors in setting up your retirement plans. 

These financial and investment advisors can help you make the right decisions for your retirement by guiding you on the appropriate time for retirement, how to estimate how much you will spend per year, how much you can save, where to invest, and how to mitigate challenges. As a financial advisor for small business owners, you can also leverage our expertise if you are looking at setting up a business to boost your retirement income.

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