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medical expenses

8 Budget Categories You’ll Likely Spend More in Retirement

by Maggie Leave a Comment

cruise ship - budget categories to increase in retirement

Many of us have big plans for our retirement including traveling the world, moving to another country or state, learning new hobbies, and reading every book.

But if you add those big plans to increased free time, reduced income, skyrocketing medical bills, and other emergency expenses associated with aging it will be hard to assume that we will spend less in retirement.

Our prospects to avoid outliving our nest egg significantly depends on our retirement expenses. It is really hard to predict how much we will actually spend on housing and health care when we retire. But we still have lots of other options for saving money and should not fall into the trap of overspending.

Here are 8 budget categories where you’ll likely spend more in retirement:

1. Travel and Vacations

Travel is the number one spending category on most retirees’ budget lists.

Many people are looking forward to doing all the traveling because they never had enough vacation time while working. It is so exciting to kick back and make big travel plans for your retirement bucket list.

But it can be so easy to overspend on travel and long vacations. You worked hard all your life, so you feel you deserve that 2 weeks of luxury cruise vacation or spend time in Paris. Compared with their working years, many baby boomers like to take longer cruises or cruises that visit more destinations.

But you may find yourself spending more on travel in retirement than your budget can afford it.

To make your dreams more affordable:

  • Take advantage of the last-minute deals
  • Travel during off-peak seasons
  • Ask for senior and AARP discounts.

2. Medical expenses

It probably doesn’t come as a big surprise that we spend more on medical care as we grow older.

Healthcare costs will be one of the top expenses that most retirees have to deal with. Unfortunately, medical care costs will keep increasing as we age.

The Employee Benefit Research Institute published their study that the percentage of a household’s total spending on health care increases from 8% in preretirement households to 19% by the time a household is past the age of 85.

For the average family, the unpredictable and costly new diagnosis can create an increase in healthcare spending. Also, overall spending on health insurance premiums, prescription drugs, medical supplies, and medical services will go up.

How to save money on medical expenses?

In addition to having the best available medical insurance, the best way to save money on medications is to use generic versions of drugs rather than the name brand.

Also, you can save money by shopping around at your local pharmacies, comparing costs online, or ordering in bulk by mail. Depending on the type and amount of medication you need, the savings could be thousands of dollars for your budget.

3. Fitness

Fitness is one of the new biggest expenses that many retirees spend money on.

According to statistics, approximately 53% of retired Americans participate in physical activity and allocate about 13% of their annual spending to fitness and leisure activities.

Retirement serves as a motivator to get fit. With more time on their hands, people start exercising more and spending money on gym memberships and fitness classes.

Also, the fear of declining health as we age motivates us to take fitness seriously. Many retirees choose to drop unhealthy habits such as drinking and smoking and pick up healthier ones.

4. Moving and Relocating

Many empty nesters start thinking about downsizing. With the kids gone, you might find it hard to keep living in 4 bedrooms house that feels too big and empty for you.

Downsizing a big home for a smaller house or condo comes as a smart strategy to save money in the long run. But the moving and relocating process can set you back thousands of dollars.

Overall, moving can be a stressful experience. Sorting through your belongings, packing, and cleaning can be overwhelming. In addition to that, high inflation will make your moving costs increase significantly.

Everything involved in a move will cost you more – movers, truck rentals, supplies, storage, etc. In addition to downsizing your home, you will need to downsize and replace your furniture – replacing a big sofa and club chairs with a smaller couch, a king-size bed with a queen-size bed, or a big dining table with a smaller kitchen-size set.

5. Vacation Home

Many baby boomers think about downsizing or moving to a different location. Others looking at the option of buying a second home to use it as a vacation home.

couple walking on a beach - buy vacation home in retirement

If you have set yourself up financially well for retirement, it can be tempting to splurge on a luxury home in a place you have always dreamed of. But in many ways, this will result in overspending.

The responsibilities of homeownership are similar for your vacation home as your primary residence. You need to consider the costs of your monthly mortgage payments, routine repairs, furniture, appliances, etc. It’s important to consider whether you are financially ready to take on these extra costs without depleting your savings and running out of money fast.

It is common for baby boomers to purchase a vacation home in a different location than their primary residence. It makes sense to choose a home in your favorite vacation destination or area with a different climate.

But it is easy to forget that the cost of living can be higher in these locations. That is why it is critical to understand the cost of living and property laws in your new location before making a final decision.

6. Utilities and Household Help

If you noticed that your utilities went up due to the inflation and working remotely, welcome to another reality of retirement.

According to the studies, the average retired household spends more each year on utilities than the average working household. It’s rather simple. Retirees spend more time at home, so they are using more utilities.

When you retire, you will see a bump in your bills such as gas, electricity, water and sewer, cable, and streaming devices because they will be used more often.

As you age, you may need to hire household and maintenance help more often than before. Maybe you do not need that help right now, but as you grow older, you will need help with raking leaves, shoveling snow, cleaning roof gutters, mowing lawns, etc.

If you want to age in place, you can get any type of personal care, household help, and services in your home which comes with a price.

According to estimates from Genworth (Financial Solutions for Long-Term Care), the median cost of hiring a home health aide is approximately $5,000 a month. And a medical response system, which is usually based on a monthly subscription, can be as much as $90 each month.

Aging in Place: Growing Older at Home

7. Groceries

It is so easy to overspend on groceries because food is going to be your third biggest expense in retirement after housing and transportation.

On average most retirees spend around 20 percent of their income on food. These food expenses include groceries, alcohol, and dining out.

Food costs will vary depending on your diet and habits. For example, people who prefer to buy organic produce will likely spend more money than people who do not.

While you may prefer to shop for groceries in one store, it might be wise to go to different stores. Different stores run promotional sales or offer coupons that can bring the price of your groceries down. Rather than simply buying all your groceries at one store, you can save a lot of money with just a little planning ahead.

Also, eating at home more frequently will cost less than eating out. The reality is that the food you cook yourself is the cheapest food you eat. When you retire and have plenty of time, there is no more excuse such as “I do not have time to cook”.

After all, learning how to cook can become your new hobby.

8. Gifts to Family and Charitable Donations

In retirement, many people become generous with gifts to relatives and friends. They feel it rewarding to share the wealth they have accumulated during their lives.

Gifting is certainly a nice gesture that comes with the feeling of being generous. But you have to be careful and not drain your retirement funds by supporting your adult children’s lifestyle or spoiling grandchildren with vacations. One day you may end up in a position where your own lifestyle suffers.

Many retirees spend too much of their income on family and friends, while others donate excessive sums to charities. There is nothing wrong with giving donations to your favorite charity or church. But as much as you believe in generous donations, it might qualify as excessive spending.

It’s a good idea to include money for gifts and donations as a separate category in your retirement budget. If you really want to give more to charity, reduce other portions of your retirement budget such as eating out, entertainment, and expensive vacations.

Related Articles:

  • How to Cut Expenses Before You Retire
  • How to Stay Fit for a Healthy Retirement
  • How to Travel on a Budget in Retirement
  • How to Retire Well on a Small Budget
  • Planning for Retirement in Your 60s
  • 5 Biggest Retirement Expenses and How to Reduce Them

Like this post? Share it if it helped you!

Filed Under: Money Management, Retirement Expenses Tagged With: charitable donations, fitness in retirement, gifts to family, medical expenses, retirement budget, retirement travel expenses

What Factors Will Affect Your Retirement Income?

by Maggie Leave a Comment

Women hands are trying to put a puzzle together

When you retire and start living off the fixed income, your lifestyle will be affected dramatically if there is not enough money to cover your expenses. It’s hard to control your retirement income, but you can take control of your retirement expenses by sticking to your spending plan.

Let’s look at what factors will affect your retirement income and how to plan for that?

1. Inflation

How inflation will affect your retirement income?

In simple words Inflation is when the prices of goods and services go up over time.There is so much talk about the inflation in the media. Why we need to remember about it?

Why, because the inflation erodes our savings and reduce our purchasing power.

We all noticed that the price of gas, groceries, clothes, construction materials and even doctor’s office going up with every year. But the longer we live, the more we’ll feel the impact of inflation on our retirement money.

Inflation has averaged about 3 ½ percent per years since the 1920s. At that rate, what costs one dollar today will cost a lot more in the future. If you need $1,000 per month today to pay for food and utility bills, you might need $2,000 in 20 years to pay for the same items.

If you expect to spend 30 years in retirement, you need to have a retirement income that keep up with an inflation more than someone who will live only 15 or 20 years in retirement.

If your assets don’t grow much faster than the inflation rate, your investments won’t buy more in retirement than they do today.

There are several ways to protect your retirement income from inflation:

  • Get the most from your Social Security paycheck.

Many of us will rely on Social Security check to provide a portion of our retirement income. Social Security has automatic annual cost of living increase. So, if you are getting closer to retirement, you might want to delay collecting Social Security until age 70, even if you stop working before then. The longer you wait, the higher your paycheck will be for the rest of your life. Delaying Social Security will give you an increase of 8 percent for each year between your full retirement age and 70.

  • Annuity is a pension you buy for yourself.

If you decide to buy an annuity as a source of retirement income, you might want to buy an inflation-adjusted annuity. This type of annuity promises to pay you monthly check that will rise with the cost of living every year until you die.

Annuities don’t come cheap, you need to pay extra if you want to add a feature to your policy. Experts recommend buying this type of annuity only if you expect to live long.

  • Choose investments that rise with inflation.

Historically, stocks and real estate did much better job of outpacing an inflation. So, one of the best ways to protect against the inflation is to keep a portion of your retirement portfolio in these assets. On the other hand, you will be losing money if you decide to keep most of your retirement assets in cash.

2. Life expectancy

How longevity will affect your retirement income?

a woman sitting on a river deck doing yoga exercise

How long will you live?

On average you can expect to live to your mid 80’s. But, no one is an average. Many people die before or right after retirement, and other live to 90s and beyond.

Do you know your family history? Or your spouse history? Did they have a history of living into their 90s, or did they tend to die in their 50s?

How long to you expect to live? Do you have a plan? What about your vitality? I think it’s important to have a strategy and create a practical road map for lifelong health. What to do through your 60’s, 70’s, 80’s and 90’s? The Vitality plan helps you to set, track and reach your goals.

You can read more about how to create a vitality plan:

What Is Your Vitality Plan?

Knowing how long you might live, can help you to plan for the years you will spend in retirement. The longer you need your retirement money, the more careful you need to be with your expenses.

How to estimate your life expectancy? There are life expectancy calculators to help you with this task.

If you want to estimate your own and a spouse’s life expectancy, go to living to 100.

You will need to answer the questions about your diet, exercise habits, social life and your family history. You may even learn how to improve your health and make changes to your lifestyle.

After you get the idea for how long you might live, you need to put together an estimate of your retirement income and expenses and for how long it will last when you stop working.

3. Debt

How debt will affect your retirement income?

Being in debt is hard at any age but being in debt when you’re near retirement is one of the worst case scenarios. The older we are, the more difficult to pay down our debts. Why? There are many reasons behind this simple question:

  • If you lose your job it might be difficult to find another one.
  • If you have health issues, you might be forced into early retirement.
  • You might be going through a divorce or your spouse died.
  • Your peak earning days are behind you.

If you don’t pay off your debt it will put a big hole in your retirement income and a lifestyle.

The sooner you clear your debt the better. Don’t wait until it’s too late. You don’t want to run out of money in your late years and then regret buying things that weren’t really important.

What to do with your debts?

First, set up the step-by step plan of how you want to pay off all your debts.

Second, avoid a future debt and make sure that you have three to six months of living expenses in your emergency fund.

Related Post: How to Pay off Debt Before You Retire?

4. Medical expenses

How medical expenses will affect your retirement income?

I admit it is very difficult to predict your medical costs in retirement. The health care cost seems to go up with every year. Many experts saying that most of retirees underestimating future health care expenses.

Health care in retirement is not free.

Medicare will cover some of your medical expenses – but not all of it. On average, we could expect Medicare to cover about 50 percent of our health-related expenses. In addition, we’ll have to pay for premiums and out-of-pocket cost. And these expenses will cost us more in the future.

According to the latest data report from HVS Financial, a 65-year-old couple will pay $363,946 for total lifetime healthcare costs.

It’s a big risk not to have planned for medical and long-term care expenses. You don’t want these expenses to wipe out your retirement savings.

5. Emergencies

How emergencies will affect your retirement income?

There are times when we need to make a fast decision. Life happens and emergency situation comes our way. Emotional stress comes with the financial stress if we don’t have enough money to cover these emergencies.

There are a lot of opinions out there how much money you should put into your emergency fund. If you have saved and put at least $1,000 into your fund, it’s better than nothing. But let’s be honest it’s not enough for people who are close to retirement. For us it’s better to have saved from three to six months of living expenses in emergency fund.

If you don’t have an emergency fund, it’s time to start one today. It’s going to take time to build up your emergency fund.

Calculate your basic living expenses, like mortgage or rent, utilities, food, gas. Then ask yourself how much money you would need to have stashed away to feel secure. At a minimum you should have three months of living expenses. So, if you need $3,500 a month to cover your basic living expenses, then you need to put $10,500 in your emergency fund.

An emergency fund brings stability and peace to your financial life in any phase of your life, but it’s especially true for retirees. Instead of panicking at every unexpected emergency expense, you’ll have a small pot of money at hand and ready for use.

Related Post: Why Everyone Needs an Emergency Fund?

6. Market risks

money tree with money symbols instead of leaves

How market risks and volatility will affect your retirement income?

If the market goes down when you’re retired or five years or less prior to retirement, it’s easy to freak out. Why? Because stock market crash might significantly reduce the value of your retirement savings. What happened in 2008-2009 financial crisis when retirement portfolios lost more than 40% of their values, might happen any time in the future.

You don’t want to see your 401(k), IRA and Roth IRA investments go down. You don’t have another 10 to 20 years to see them recovered from market downturn. You might not have enough time to make up those losses. You will need these money to generate your retirement income.

If you want to protect your retirement savings from market downturns, you need to spread the risk and diversify your portfolio. The idea is that not everything in your investment portfolio goes up and down by the same amount at the same time. Don’t put all your eggs in one basket.

You might already know that investment portfolios are traditionally organized by age, your goals & risk tolerance. The sooner you think you’ll need the money, the less risk you should take. Why? You have no time to recover the setbacks. Simply put, If you portfolio suffered 50 percent loss, you will need to recover 100 percent to make it even. It will be hard to bounce back from significant financial losses.

When your retirement within the reach, the experts recommend diversifying your portfolios with 60/40 asset allocation. It means 60 percent invested in stocks and 40 percent in bonds.

Related Post: How to Set Up Your Retirement Portfolio?

Related post: 5 Basic Rules of Investing for Women

Putting it all together

According to the experts when it comes to retirement, one of the worst mistakes people make is neglecting to plan ahead. Instead, they just “wing it” and draw down their retirement savings fast. They take out what they need for living expenses and hope their money will last.

Well, hope might not be a good strategy!

Instead, you’ve got to have a plan. You’ve got to carefully consider what your retirement needs, how much is your retirement income and how it will be affected in the long run. All this planning is to make sure you don’t run out of money in your late years.

Do you know how much is your retirement income? Are you prepared for the long run? 

Filed Under: Retirement, Retirement Income Tagged With: life expectancy, medical expenses

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Hi, I'm Maggie. Welcome to Save, Invest & Retire! I am on a mission to help baby boomers learn how to save & invest smart. Follow me on detailed information about retirement planning, travels, and living the life of your dreams.

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