Many future retirees expect to be spending less than they were spending before retirement. But according to the latest Consumer Survey from the U.S. Bureau of Labor Statistics the average retiree household spends around $50,200 per year (or $4,183 per month), while the average household spending is $63,036 (or $5,253 per month).
Although some expenses such as costs of commute, business clothes and lunches, insurance, payroll taxes (if you are not working) will go down or disappear in retirement, many others will go up.
Here is a look at the list of the 5 biggest expenses in retirement and some tips on how to reduce them.
1). Housing Expenses
The cost of housing is the biggest financial burden we face. We all should remember about a long list of expenses as part of owning a home:
- Monthly mortgage payments of principal and interest
- Real estate taxes
- Homeowner’s insurance
- Utilities, including electricity, heat/gas, cable, wireless, etc.
- Water and sewage
- Trash and garbage collection
- Regular ongoing maintenance
- Repairs and maintenance
- Renovation or improvement projects
The cost of homeownership for the average American household is $13,153 annually without the cost of a mortgage. I have calculated that Roman and I spend $28,400 a year on a mortgage, insurance, taxes, utilities, and maintenance. These costs take 25 percent out of our annual budget without the cost of home improvements or major repairs.
The good news is that there are many ways you can reduce the cost of ownership in retirement:
Pay off your mortgage. One of the smartest things you can do is to pay off your mortgage before you retire. A mortgage-free retirement is usually best because you can spend more money on the fun stuff. Retirees often have to withdraw money from their retirement funds to cover their mortgage payments. Unfortunately, those withdrawals typically trigger more taxes. That is why it is better to pay down your mortgage while you are still working, so you can keep your housing expenses low.
However, for many people paying off the house is not financially possible. When a payoff is not feasible, you should reduce mortgage debt by refinancing it. With mortgage interest rates at all-times low in 2021, I highly recommend to refinance your mortgage ASAP. We refinanced our mortgage in February with AmeriSave Mortgage Corporation at 2.5 percent and saving about $500 a month. Overall, refinancing will help to lower your monthly payments and ease the financial burden on your retirement income when you stop working.
Downsize your home. If the kids are living on their own and you find yourself an empty nester living in that huge house, then it is a perfect time to downsize your home. Downsizing is one of the best ways to reduce your monthly living expenses. You can sell your home, and move to a smaller home or condo, so you can get extra cash into your pocket today.
Think about the advantages of a smaller home or condo:
- A smaller mortgage
- Lower property taxes
- Reduced homeowner’s insurance premiums
- Fewer maintenance costs
- Less yard work, especially if you get a condo.
Take on a tenant. If your mortgage is paid off and you prefer to retire in place, you can rent out a room in your home. I understand that being a landlord is not for everyone. But if you do not want to leave your current home and neighborhood, taking on a tenant will help to reduce the expense of owning a home.
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2). Transportation Expenses
The cost of transportation is likely to drop when you stop working. While you will not spend money on commute anymore, not all your transportation expenses will disappear. You still will have to budget for the cost of vehicles, gas, insurance, maintenance, and repairs.
Downsize your vehicles. We all know that cars are expensive. One of the best ways to reduce the cost of transportation is to downsize your vehicles. If a large chunk of your income goes into maintaining several cars or driving luxury cars, I would suggest downsizing or choosing a different car. The savings on insurance, gas, and maintenance will significantly reduce your transportation cost in retirement.
Buy a used car. Many people choose to lease their cars because they want to have a new car every few years. Leasing works better if you are on the road for business and can deduct the lease payments. But if you are getting closer to retirement, buying a good used car, rather than a new one for the image will help you afford retirement sooner. In the end, the cost of buying should be less expensive than leasing a car in the long run.
Public transportation. Another option to consider for retirement is to move close to an urban area and take advantage of public transportation. In this scenario, you might not need a car at all. When you want to go on a road trip, simply rent a car.
Car-sharing services. Most urban cities also have car-sharing services that give you easy and affordable access to a car for temporary needs. Also, using services like Uber or Lyft can help you save money without the regular monthly costs associated with owning or leasing a car.
3). Healthcare Expenses
You can expect your medical expenses to be some of the biggest in retirement. With rising life expectancy and healthcare costs, you should expect to pay more for this budget category as you grow older.
According to recent data from Fidelity, the average out-of-pocket healthcare cost for a 65-year-old couple will be close to $285,000 instead of $265,000 as it was two years ago. And that number does not even include long-term care costs.
Many baby boomers who are close to retirement still believe in free Medicare. I assume people do not do enough research to understand that Medicare does not cover all your medical expenses. Before you retire, it is a good idea to have a clear understanding of what Medicare covers and what it does not. Knowing that will help you save hundreds of dollars.
Most people will be eligible for Medicare once they turn 65. But if you retire early, you have to find and purchase health care insurance on your own. Medicare consists of 4 parts and each part covers specific medical services. Although Medicare covers a wide range of health problems, it does not include most dental care, hearing aids, and long-term care.
There are several ways to avoid being hit by a big medical bill while living on a fixed income and do not how to pay for that:
First, you need to plan for future healthcare expenses and save more money. You can set up a health savings account (HSA) and start contributing money regularly. It is a tax-deductible account that helps to reduce your taxable income. With withdrawals from HAS, you can pay for qualified medical expenses, including dental and vision.
Next, you need to decide how to pay for long-term care if you or your partner need it. Long-term care insurance is the most recommended way of planning for future expenses. It will help you not to be a financial burden on your family if that time comes.
Lastly, do not forget to get regular check-ups, screenings and to visit your doctor, so that if any problems get caught early you can do something about them.
The best way to reduce healthcare costs is to take care of your health so you can live a long and healthy life in retirement. What you eat today and how often you exercise will impact who you are in 10 or 20 years. Being active and eating right can add more years to your life and save money on future medical bills.
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4). Food expenses
The cost of food is rising gradually, and it has a big impact on a home budget. Roman and I spend almost $10,000 per year on food, and it does not include eating out. We used to spend $100 to $150 for a nice dinner in Boston once a month. If you add buying lunches for the two of us twice a week, it will add another $40 to $60 per week. Overall, we would spend almost $5,000 on just eating out.
Since the covid pandemic, we stopped spending money on restaurant meals and take-out lunches. Instead, I buy groceries at Whole Food or Wilson Farm stores and cook homemade meals. This way I know that we eat great and healthy food. And our last year’s budget showed that our decision to cut on eating out saved us a lot of money.
It is not that you should never eat out. But if you are retired and worried about covering your daily expenses, reducing the number of times you dine out at a restaurant can help to reduce the cost of it.
However, one of the best ways to save money on food is cooking and eating at home.
5). Travel expenses
For many baby boomers traveling is the number one goal on their retirement bucket list. After all, most people want to explore the world when they have so much time on their hands.
But traveling is expensive. You have to spend money on accommodations, air tickets, restaurant meals, rental cars, entertainment, tours, and more. While you are working you are limited to a few weeks of vacation. But when you retire you are more flexible with your time of travel.
To reduce the costs of travel you can take advantage of last-minute bargains, travel at an off-peak season, use senior discounts, and slow the pace of your travel. However, if you are anything like me and my husband, you can expect the travel budget only to grow in retirement.
Eventually, I would expect our travel cost to drop off when we are in our 80s or 90s. But I would expect the decades of amazing and memorable trips until we are too old to travel.
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Final Thoughts
As I said before, your expenses are likely to decline with age because most people don’t need as much as they grow older. In the early years of retirement, you will be relocating, traveling, and maybe spending more on luxuries you missed to enjoy when you were busy working.
But later in retirement, you are more likely to be settled in your lifestyle. You are less likely to be actively spending in your 80s or 90s. Your life will become simpler and more limited with changing your energy levels and health.
While no one can see into the future, we all still need to do a good job of predicting and probably reducing our expenses by planning ahead of time. In the end, it is critical to get your big expenses under control before you retire so you can account for them in your retirement budget. After all, you do not want to run out of money fast so you have to start looking for a job in your 80s.
Are you planning to reduce your expenses? Share your comments and ideas with us.
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