How Your Spending Changes in Retirement

Published July 22, 2017
Household spending generally drops at retirement and then continues to decline throughout retirement. Here’s how people’s spending changes the most and how it can effect your saving plan.
  • Retired households’ annual expenditures are only around 80% of working households’ annual expenditures than pre-retirees
  • Retirees spend more on healthcare
  • Among other things, spending is reduced on food, housing, clothing, and transportation

Studies done by the Employee Benefit Research Institute and the Bureau of Labor Statistics show that retired households’ annual expenditures are around 80% of working households’ annual expenditures. Within retired households, consumption declines steadily with age, dropping to 50-65% of pre-retirement consumption later in life. Among other things, retirees spend less on food, housing, clothing, transportation, and entertainment, but do spend more on healthcare. We found that spending changes in retirement are most common in these categories: 

Work-Related Expenses

Food, clothing, and transportation are all considered work-related expenses that decrease when someone leaves the workforce. The average household with a 75 year old head of household spends $10,000 annually on food, clothing, and transportation combined, as compared to $18,000 for a household of pre-retirees.

Savings & Taxes

Reaching retirement means that the portion of one’s income allocated towards retirement savings is no longer necessary. In addition, without wages, Social Security and Medicare (FICA) taxes are no longer due. Pension and Social Security contributions are on average $7,000 for a household of 55-64 year olds, as compared to $800 for households 75 and older.

Housing Expenses

Housing expenses are also lower in retirement, driven by a decline in mortgage debt. On average, pre-retiree households spend $18,000 per year on housing, which declines to $13,000 for households aged-75 and older.

Healthcare Costs

Despite access to Medicare, households spend more on healthcare in retirement. Its coverage is not comprehensive, requiring some to purchase supplemental Medicare coverage and/or long-term care insurance. Additional out-of-pocket expenses include drugs, hospital care, and extended stays at nursing homes. Healthcare costs make up 9% of spending for households in the 55-64 group, which increases to 16% of spending after 75.

Miscellaneous Expenses

Other expenditures include entertainment, personal care products and services, travel, and life insurance also generally decline. Total consumption for households aged 55 to 64 averages at $9,000 per year, dropping to $7,000 for households aged 75+. Lower spending on entertainment is the biggest driver of this decline.

How Do Spending Changes in Retirement Affect Your Saving Plan?

Use this data to plan ahead for retirement by looking at your spending today and evaluating whether your consumption will similarly decline. Then compare your expected spending to sources of retirement income, such as Social Security. Spending gaps — where your expenses are greater than your income — can be filled by contributing to your Personal Pension or an income annuity to ensure guaranteed lifetime income.

One final caveat — you know better than anyone the kind of retirement you want. The data we’ve provided are just averages. If you plan to travel a lot, for example, make sure you factor that in.

How Can I Start a Personal Pension?

A Personal Pension is a contract between you and top rated insurance companies. By making contributions to your Personal Pension over time, you develop a portfolio of guaranteed income available in retirement. Blueprint Income offers a Personal Pension account with the lowest minimum, $5,000. After opening an account, you can make subsequent contributions of as little as $100, each of which will increase your pension check.

Here you can see what contributing to a Personal Pension will guarantee you in retirement income. After just a few years in retirement, you’ll have recouped your initial investment, and the rest will be profit.

 

You can continue with the enrollment process on your own or fill out the information to have one of our specialists follow up with you by starting with the Personal Pension Builder, where you’ll be able to set a goal for how to grow your pension over time. Note that all future contributions are optional, but it’s always great to have a goal.

How Can I Purchase an Income Annuity?

At Blueprint Income, we offer annuities from more than 15 top rated insurance companies. Click below to get real-time personalized quotes.

pacific life annuities

From there, you’ll get access to our annuity guides and a team of specialists to help you analyze your retirement finances and walk you through the application process.

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Nimish Shukla

Nimish Shukla

Financial Planning Professional

Nimish has spoken with thousands of customers about retirement spending. As a CFA Charterholder and licensed fixed annuity producer he values the importance of building an income stream for retirement. In addition to his work at Blueprint Income he is also a regular contributor to Nerdwallet.