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One of the main ingredients for a satisfying retirement is financial security. But in order to figure out how much you need to save for the future or when you might leave the workforce, it's important to have a basic understanding of how much your retirement expenses may be.
Even if you don't plan to do extensive traveling or purchase a second home when you get older, bills can add up quickly. It's never too early to look ahead at what the cost of retirement may be for you, so you can prepare accordingly.
How Much Does It Cost to Retire?
One important financial decision many people face is choosing when to finally leave the work world behind. While spending more time with family and friends might sound enticing, leaving your job without the proper financial resources could end up creating unnecessary strain down the road.
Setting retirement goals can be easier with a solid understanding of how much money you may go through in your later years. The reality is that there's no one-size-fits-all number you can rely on. According to the latest data from the Bureau of Labor Statistics (BLS), a typical American age 65 and older will spend $50,860 each year. That's about $15,000 less than those in the 55-64 age bracket and more than $24,000 less than individuals in the 45-54 age bracket.
However, that figure can change dramatically based on your lifestyle, health, where you live and a host of other factors. That's why it's important to consider your goals in retirement and do some basic calculations to figure out what your specific budget might look like, taking inflation into account. Denoting your future expenses on paper or a spreadsheet can help provide a target upon which you can base your investment strategy.MORE: How Much Do You Need to Retire?
7 Typical Expenses in Retirement
With no daily commute and perhaps fewer children to support, many adults end up spending less overall when they exit the workforce. The BLS research suggests that the average adult will spend roughly 80% of what they did prior to their retirement.
But relying on broad rules of thumb can be tricky when planning your retirement, since every household's situation is different. Here are some of the common expenses in retirement to consider.
1. Housing and Utilities
Housing is by far the biggest expense category for those over the age of 65, with the median adult allocating $16,940 a year toward this, according to the BLS. The cost of utilities such as electricity and natural gas tack on an extra $3,806 for a typical American in that segment.
If you're on track to have your mortgage paid off before or shortly after you retire, you may be able to shrink this portion of your budget. But if you still have a long way to go on your home loan, you'll likely want to set aside the appropriate amount when forecasting expenses. Renters may also want to account for potential increases over time.
Just because you're not pulling into work every day doesn't mean you won't be spending a substantial amount of money on transportation. In fact, it's the second-largest expense category for those who are around the age of retirement, costing even more than food or medical care.
In 2018, the average retirement-age American spent $7,270 on cumulative transportation costs, according to the BLS data. That includes the cost of new cars every few years, as well as maintenance, gas and insurance costs.
Your expenses may go down if you're married and choose to scale back the number of cars you own. But it's important to have a good idea of how much you may need to depend on vehicles and other sources of transportation, especially if your loved ones don't live nearby.
3. Health Care
For the majority of adults, health care costs will represent a substantial portion of your overall retirement budget. In addition to premiums, there's a good chance you'll have to pay for supplemental insurance, out-of-pocket costs, prescription drugs and medical devices — all of which add up.
Though individuals with a clean bill of health may pay less per year, living longer typically means spending substantially more on medical needs over the long haul. According to 2019 data from HealthView Services, a cost-projection software firm, a healthy 65-year-old couple can expect to spend $387,644 on health care over the rest of their lives. When factoring for inflation, that could be as much as $572,960.
In general, individuals can expect their yearly medical costs to rise as they get deeper into retirement. In 2019, an average 65-year-old couple could expect to pay $12,286 annually. But those same people will spend an average of $21,164 at age 75 and $34,268 at age 85, according to HealthView Services.
4. Long-Term Care
Many adults will require a stay at a long-term care facility at some point of their life, and the national average cost of care in a one-bedroom assisted living facility is $3,628 per month, according to the U.S. Department of Health and Human Services. For a private room at a nursing home, a typical adult can expect to pay $7,698 per month. Depending on where you live, these costs may be higher or lower than the national average.
Unfortunately, Medicare only pays for those costs under limited circumstances. And while Medicaid may cover longer stays, it's only an option for those who are income-qualified and go to facilities that accept its recipients. That means many retirees will have to save up to pay those costs out-of-pocket should they need care within a facility. Purchasing long-term care insurance may help alleviate some of those expenses later on.
In general, the amount of money spent on food tends to go down slightly when adults quit the workforce, but this cost can still impact your savings.
According to the BLS, a typical American over the age of 65 will spend $6,607 a year on food and beverages. Of that total, groceries account for $4,009, while eating out represents a $2,598 expense for the average older adult.
6. Hobbies & Entertainment
Exiting the work world typically translates into more time for the activities that give you enjoyment. This could mean paying more for hobbies and entertainment than you did as a full-time employee with less leisure time.
If you envision your days being filled with simple pleasures such as gardening or playing tennis, you may not notice a huge change in your discretionary spending. But other pursuits, such as joining a golf club or traveling, can create a larger financial burden. Even if you are years away from retirement, you may want to consider creating an entertainment and travel budget.
7. Miscellaneous Needs
Even purchases that seem pretty small by themselves can add up — whether it's clothing, personal care products or even services such as lawn care. Accounting for each of those miscellaneous expenditures can be a tricky endeavor.
However, one way you can try and get a handle on them is by reviewing your current bank or credit card statements to see how much you currently spend on these "other" categories. Then you can make appropriate adjustments if you envision yourself spending more or less on those expenses as you hit retirement age.
Paying Your Retirement Expenses
You may have any number of different income sources to help cover the cost of retirement, including a pension, Social Security or part-time work. However, the money from these sources may fall short of your total financial needs.
401(k)s or similar savings accounts that are offered through your employer can be an effective way to save for retirement. If your place of work offers matching funds, it may be even easier to jump-start your savings. But what if your employer doesn't offer a retirement plan? You may consider opening an individual retirement account. As of 2020, you can contribute up to $6,000 to an IRA, or $7,000 if you're age 50 or older.
Those who are worried about outliving their assets sometimes choose to purchase an annuity that pays a fixed monthly amount for as long as they live. If you're curious whether converting some of your assets to a lifetime income stream is right for you, consider talking with a financial professional who can discuss the potential advantages and disadvantages of doing so.
Regardless of how you fund your retirement, it's important to first have a good sense of what you'll need to live on during your later years. By doing a little planning now, you can help minimize the threat of running into financial hardship down the road.