People tend to spend an average of about 20 percent less after they retire. We no longer have to pay Social Security payroll tax. We spend less for clothes, commuting and childcare. And we don’t have to save for retirement or our kids’ college education.
Household expenses steadily decline with age, falling an average of 19 percent between ages 65 and 75 and a total of 34 percent by age 85, according to a study by the Employee Benefit Research Institute. Nevertheless, you still have plenty of things to pay for, even though you no longer receive a paycheck. Here is a rundown of your major expenses — and what you can do about them — after you take the plunge into retirement.
1. Housing. This remains the largest expense in a retiree’s budget, just as it probably was before you retired. People over age 50 spend an average of 40 to 45 percent of their household budget on housing and housing-related items such as utilities, home insurance, home furnishings, gardening and yard expenses, EBRI found. But this is one expense you can control, if you want to. You do not have to redecorate. You can downsize to a smaller home in a less expensive neighborhood. Some retirees even move to a part of the country with a lower cost of living. And many retired homeowners have the option to take out a reverse mortgage to put more cash in their pockets.
2. Health care. This category of expenses tends to increase with age. Even if you have good health insurance you’ll likely face increasing out-of-pocket costs for medical procedures and tests, as well as both prescription and non-prescription drugs. And don’t forget dental expenses, which also tend to go up as we get older. Health care costs typically swell up from 10 percent of income for those in their 50s to 20 percent for people in their 80s. One option to consider is long-term care insurance, which will cost you money in the short term, but may save you from spending down all your assets if you need extensive nursing or assisted-living care.
3. Taxes. You’re no longer subject to payroll taxes once you stop working, but you may still have to pay income tax on a portion of your Social Security benefits as well as income you receive from investments and withdrawals from your IRA. In addition, some states tax Social Security and pension income. If you intend to move in retirement, it’s worth researching which states give tax perks to retirees.
4. Transportation. You will save on commuting costs after you retire, but you still have to get around. Even with the recent lower price of gasoline, it costs over 50 cents per mile to drive your own personal vehicle when you factor in insurance, maintenance, repairs and depreciation. One way to save is to downsize from two cars to one car. In some neighborhoods with good public transportation it’s even possible to go carless.
5. Travel. Many retirees, especially younger retirees, say that travel is one of their top priorities. A survey by Allstate found that baby boomers’ most desired activity is travel, and on average they plan to spend $7,700 annually, taking four trips a year. This is obviously a discretionary expense, and the one you have the most control over. You can travel as much as you want, or not at all, and you can stay at a five-star hotel, or you can stay over with the kids. It’s all up to you.
Tom Sightings blogs at Sightings at 60.
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Put a Lid on Your 5 Biggest Retirement Expenses originally appeared on usnews.com
