No matter how old you are right now, you should already be saving for retirement. Whether you’re contributing to a 401(k), IRA or other long-term investment (or all three), you have to make sure that you’ll have enough money to stop working and have enough money to last the rest of your life.
However, how will you know when you’ve reached a reasonable amount? How can you be sure that your nest egg will sustain your lifestyle during your golden years? Saving is a two-pronged approach: first, you need to put away enough while you’re employed.
Second, you have to know how much you’ll be spending during retirement so that you know when you’ve reached your goal. In this piece, we’re going to discuss how to manage your spending habits when you’ve finally stopped working.
Retirement Spending By the Numbers
Although everyone’s retirement plan will be unique, there are some general guidelines to consider when planning on an annual budget. According to the Bureau of Labor and Statistics, the average retiree between 65 and 74 spends about $50,000 annually.
Interestingly, once a person gets into late retirement (75 and up), that number shrinks to roughly $37,000. While many factors can influence those figures, they illustrate that, as one gets older, one's expenses are likely to decrease substantially.
One rule that gets thrown around a lot regarding retirement spending is the 80% rule. This rule stipulates that you should plan to spend roughly 80% of your current income during your golden years. In some cases, that figure may be as high as 100% or even more.
Usually, where you live will determine how much this percentage fluctuates. For example, if you retire in a wealthy area where the cost of living is high, your monthly bills will be larger than if you settled in a less austere neighborhood.
Roughly 15% of your retirement expenses will be related to healthcare, which is likely to increase as you age. Whether you have to visit the hospital more frequently, take more medications or get in-home care, healthcare is one expense you can’t afford to skimp on.
Finally, if you plan on living out your golden years by traveling and crossing off items on your bucket list, you can expect to increase your annual spending by at least 5%. Travel and leisure expenses are one reason why those in late retirement don’t spend as much -- once you reach a certain age, jet-setting around the world just doesn’t have the same appeal.
Breaking Down Your Retirement Expenses
While the 80% rule does give you a baseline for retirement planning, there is plenty of flexibility within that number. Since there are so many various expenses you could be spending money on, it helps to look at them individually. In this section, we’re going to cover the average amount retirees spend on these items and which factors can influence your total.
Cost of Living - Average $1,322 Monthly
As you might imagine, most of your retirement income will go toward living expenses. This average total does include everything, such as utilities, property taxes and other maintenance costs. Again, if you live in a high-value area, your monthly total will be much higher. Retirees in California will have to pay a lot more than those living in Missouri.
How to Lower Your Housing Expenses
Fortunately, there are plenty of ways to mitigate a high cost of living. Some of the best methods can include:
- Downsize - Move into a condo or apartment during your golden years. If traveling is your primary concern, perhaps living in an RV is a viable option.
- Get Roommates - Either you can rent rooms in your home, or invite children or relatives to live with you. The best part about the second option is that family members are more likely to assist with daily activities and chores, particularly as you get older.
- Create a Rental Property - If you like the idea of downsizing but don’t want to lose equity in your home, perhaps you can move into an apartment and rent your house. As long as you make a profit on the rental, you can minimize your retirement costs altogether.
Travel - Average $923 Monthly
If you’re like most retirees, a lack of full-time employment means that traveling becomes more accessible. Since you don’t have to worry about taking time off, you’re free to see the world.
Travel costs go up every year, and as you get older, you’ll have to secure more elderly-friendly accommodations. Also, international travel is going to be much more expensive than domestic trips, so you’ll likely have to plan your adventures accordingly.
How to Lower Your Travel Expenses
Here are some pro-tips for retirees looking to become worldly without the high price tag.
- Utilize a Travel Service - Typically, when booking most of your trips with the same company, you can save hundreds on various costs like flights or hotel stays. While an individual trip might be cheaper by booking everything separately, this strategy works when you plan on traveling more frequently. Plus, they may offer rewards points that can add up as well.
- Cut Down on Amenities - This tip is based on personal preference, but you can save money by booking at a lower-star hotel. If you plan on sightseeing most of the time anyway, the hotel is merely a place to rest afterward. Most of the amenities won’t enhance your trip that much, so why pay for them?
- Travel in Groups - Retirement is an excellent time to make friends and develop a tight-knit social circle. If you travel with fellow retirees, you can save money on individual costs. Plus, trips are often more fun when you have friends along.
Dining and Entertainment - Average $680 Monthly (Combined)
Everyone has to eat, including those in retirement. If you want to split these expenses, most retirees spend roughly $500 on food and another $200 on entertainment.
With so much free time, it makes sense to take advantage of new culinary and cultural experiences. However, while some individuals may acquire a taste for the finer things in life, others might forgo fancy meals and nights on the town.
Fortunately, when it comes to managing your monthly expenses, both food and entertainment are easy to scale up or down. If one month you went over budget, you can cut back the next so that it balances out. Overall, while a five-star dining experience is delightful, you’ll likely want to indulge sparingly to ensure that your funds last longer.
Healthcare - Average $500 Monthly
Unfortunately, this expense won’t go down over time, nor is it one that you can control easily. As you get older, your healthcare needs will increase. The only silver lining is that any medical problems may force you to cut back on other expenditures (i.e., travel), so your overall annual budget might not increase too much.
If you have to receive long-term care, the costs can be prohibitive. Whether you stay in a full-time facility or get in-home assistance, the expenses will take a substantial chunk of your nest egg. While long-term care insurance can help alleviate these costs, the monthly premiums are also high.
How to Mitigate Health-Related Expenses
Although you can’t stop the effects of aging, you can usually slow them down. Here are our top tips for maximizing your health so that you might not have to spend as much on hospital visits and medications.
- Focus on Nutrition - A balanced diet of vegetables, simple carbohydrates and protein can go a long way toward helping you stay in shape. We recommend meeting with a nutritionist to develop a unique dietary plan for retirement. This way, you can customize your habits to fit your lifestyle and body type.
- Exercise Regularly - Even walking around the neighborhood can work wonders on your body. Exercise will keep the blood flowing, as well as alleviate joint pain and muscle soreness. Simply put, the more you use your body, the stronger it gets. Don’t let retirement tempt you into a sedentary lifestyle.
- Lean on Friends and Family - Paying for in-home care can be costly. However, if you have adult children or fellow retirees that can pop in to help regularly, you can save a bundle. Also, it may be worthwhile to get assistance from an occupational therapist. Occupational therapy is designed to foster independence by focusing on specific activities rather than general muscle strength and stamina.
Additional Retirement Costs
While housing, food, and travel are the most significant expenses you’ll face during retirement, they’re not the only ones. Here are some other elements you might have to pay for during your golden years.
The best way to save on life insurance is to buy a policy at a relatively young age. However, if you have whole life insurance, your monthly premiums will increase as you get older. Also, if you don’t have a policy now and want to get one, you’ll have to pay more due to your age.
How to Reduce Life Insurance Expenses
Although life insurance can be a good idea, you don’t have to settle for high premiums. Here are some tips on how to get coverage while cutting down on costs.
- Cancel your policy - Since you are retired now, there might not be any reason to carry any life insurance.
- Lower Your Death Benefit - If you have whole insurance, you can likely adjust your death benefit. The primary reason to do this is if your beneficiaries don’t need as much financial protection when you pass.
- Tap Into Your Cash Value - Another benefit of whole life insurance is that it accrues a cash value over time. You can use these funds to pay your premiums, rather than out-of-pocket.
- Get Burial Insurance - If you don’t have a policy yet, burial insurance is often more affordable. The death benefit is lower, but it’s also easier to qualify, even when you’re older.
In most cases, your retirement costs will be for yourself. However, if you have others depending on you for financial stability, their needs can cut into your nest egg. Some examples of dependents can include:
- Children - Unfortunately, many adult children are getting assistance from their parents, due to various factors like low wages and high costs of living. Roughly one in four millennials are currently living with their parents.
- Pets - Pets are excellent companions, particularly during retirement. While a pet isn’t often a high cost, you do have to pay for food, veterinary care, and boarding for when you’re traveling.
- Parents - In some cases, retirees have to support their parents. Usually, this happens when a parent requires long-term or continuing care and cannot afford it. Other times, a parent might outlive his or her nest egg and need financial assistance.
What If I Don’t Have Enough? Ways to Make Money During Retirement
One of the most significant challenges in retirement is ensuring that you have enough money to last as long as necessary. For example, if your nest egg can only cover 20 years of retirement, what happens when you reach 86? What if you live until you’re 90 or 100?
If you’re worried that your retirement savings won’t keep up with your spending habits, here are some options to increase your revenue stream.
- Part-Time Job - We’re currently living in a gig economy, which means that there are plenty of opportunities for retirees. Whether it’s a regular job like Wal-Mart greeter or an app-based gig like Uber, you can often work as little or as much as you like.
- Room or Property Rentals - Sites like Airbnb make it easy to rent your home to help cover the bills. You can either be a live-in host or rent your property while you’re out of town.
- Side Business - With so much free time on your hands, retirement may be the perfect opportunity to become an entrepreneur.
- High-Yield Investments - While IRAs and other retirement accounts will grow over the long-term, they are relatively limited. Examples of high-yield investments can include buying a rental property, peer=to-peer lending or stock trading.
Contact NextGen Wealth Today
No matter your financial situation, it’s always helpful to work with an advisor. Whether you’re decades out from retirement or it’s just around the corner, we can help you plan for all of your expenses. The more prepared you are now, the more you can enjoy your golden years. Contact us today to see how we can help.