How will you spend your money in retirement? There are some misconceptions that retirees will spend significantly less in retirement than during their working years. Though retirees generally experience less expenses, it is not significantly less, so it’s important to understand your budget, your retirement funds and the length of retirement. Consider the necessities you need and the luxuries you want to ensure the best possible quality of retirement. Maintaining a budget and controlling expenditures when possible, will help retirees avoid depleting their nest egg.
One of the main issues facing retirees is the fact that they will live longer. Life expectancy has increased over the past 7 decades with seniors living longer, creating a potential for outliving their retirement savings. Planning for the future is never exact but it is possible to live a quality lifestyle by understanding how your budget works in retirement.
Housing is a considerable amount of any budget and does not necessarily diminish in your golden years. Consider if your mortgage is paid off, if not when will it be? If your current mortgage is not practical, would downsizing be more affordable? Perhaps, the mortgage is paid off, but you still have to factor in property taxes and maintenance, possible renovations, utilities, yard service and insurance. In addition to your main residence, factor in any other income properties or vacation homes, as their monthly expenses become part your housing budget. Dayana Yochim of NerdWallet asserts, “You may be close to paying off your mortgage, but housing is the biggest spending category for all age groups — retirees included. Some costs never go away, even when a home loan is fully paid” (marketwatch.com).
When budgeting, factor in transportation expenses. Whether you own vehicle, use public transportation or rideshare such as Uber or Lyft, the ability for a retiree to travel within their community is a necessity. Car insurance rates fluctuate but there is a correlation with the increase rate of automobile insurance and age. According to the Social Security Administration, transportation and travel is the second largest expenditures for retirees next to housing. Retirees do see a reduction in their gas budget and car maintenance costs due to no longer having commutes associated with full time work. Yochim asserts, “people older than 65 do catch a break on transportation costs. The $6,814 annual average outlay, which includes the costs of gas, insurance, maintenance and repairs, is about one-third less than the nearly $9,000 average households of other ages shell out each year” (marketwatch.com). Travel expenses tend to rise because of the extra leisure time available in the retirement so, take advantage of senior discounts when traveling and travel during off peak times to save. If the budget needs to be lowered, consider having no car payments or lease payments, which would eliminate the need for full coverage auto insurance. Using public or private transportation would also cut costs for gas, maintenance and insurance.
Unfortunately, retirees must continue to spend on healthcare and health insurance. The cost of healthcare goes up with age until 65 when Medicare kicks in. In many instances, this category is under budgeted by seniors because while in the work force, employers covered a significant portion of the premiums for healthcare coverage. After retirement, those costs fall entirely on the retiree and healthcare costs go up as the need increases. Consider the possibility of long-term care and the costs associated with it. Seniors are living longer and care options are becoming more expensive. This is a combination that leads to a shortfall between needs and healthcare options for retirees. Even those who have long term care insurance may find that their benefit levels are not enough to cover the rising costs and don’t have the savings to pay the difference. This is how many seniors wind up having financial difficulties as they get older.
Seniors often do not adequately factor in food costs when creating a budget. This is a budget line that typically decreases compared to all average households. There are usually less mouths to feed, and appetites may have decreased showing a decrease in food costs. Consider when traveling, to limit restaurant visits as they tend to be 75% higher than eating home cooked meals. Utilize senior discounts and early bird specials when you do indulge. Clip coupons and buy sale items.
Yochim describes the elderly, “Apparently with age comes a greater appreciation of one’s financial blessings. Retirees report dedicating $2,429 of their annual income to “cash contributions (which include charitable donations), compared with $2,081 by the average household” (marketwatch.com). Seniors tend to feel more generous as they enjoy their golden years and give a little more to friends, family, charity or their new hobby. There are some anticipated social events, graduations, weddings that are on the radar so be sure to budget accordingly.
Do not forget to factor in entertainment. This is the time to cross off items on the bucket list and seek adventures. Few things are free, so balance those experiences with financial planning. Consider all personal memberships and activities that you are already committed to and their monthly costs as well as the costs of any new hobbies and interests. Ideally, living a high-quality of life is the end game, but calculate your budget for a minimum of 20 plus years.