How Your Spending Changes in Retirement
Oct 4, 2022
Blueprint Income Team
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:
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.
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 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.
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.
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.
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 purchasing 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.
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Blueprint Income Team
We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.