Typical Retirement Expenses to Prepare For
Many people dream about how their retirement years will play out. Some want to spend their golden years spoiling the grandkids, while others envision traveling the world. As long as retirees have saved enough during their working years to fund the expenses, these goals are attainable.
Unfortunately, not all Americans know what to expect regarding living expenses during their retirement years. They may not know how to budget for ordinary costs in retirement, like housing and transportation, or make the most out of retirement income. Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend and how much they need to budget for retirement.
This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.
Average Monthly Cost of Retirement Expenses
According to the Bureau of Labor Statistics, an American household headed by someone aged 65 and older spent an average of $48,791 per year, or $4,065.95 per month, between 2016 and 2020. More specifically, households headed by someone between the ages of 65 and 74 spent $53,916 annually during these five years, while spending dropped to $41,637 annually for people aged 75 and older.
Retirees usually spent less than the American average, which was $60,593 per year, or $5,049.42 per month. Retirees also less than people nearing retirement, those aged 55 to 64, who spent $65,392 annually between 2016 and 2020.
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5 Common Retirement Expenses by Category
The typical budget for retirees needs to cover expenses for a retirement that could stretch over two or three decades. Drilling down to specific categories can help retirement savers determine benchmarks for their own budget.
1. Housing
Housing expenses, such as mortgage payments, insurance, and maintenance costs, are among the highest costs retirees face.
From 2016 through 2020, Americans aged 65 and older spent an average of $16,880 annually, or $1,406.68 per month, on housing-related costs.
These expenses can vary dramatically by location and housing type. For example, housing costs are typically much higher in a coastal California community than in a real estate market in a state with relatively low property taxes, such as Wyoming, South Carolina, or Colorado. This might be a factor to consider when weighing the best states to retire in.
2. Transportation
Many retirees want an action-packed retirement full of entertainment, socializing, visiting family, and traveling the country. That means that transportation costs can be a significant factor in retirement expenses, especially early in retirement.
Americans spent an average of $11,910 per year getting from point A to point B between 2016 and 2020, but retirees spent a little less. Those over age 65 spent an average of $7,062 annually on transportation, or $588.50 per month. People aged 65 to 74 spent $8,497 per year, and people 75 and older spent $5,073 per year. These numbers cover everything from buying a car to filling up the gas tank and could be significantly higher for those who spend a lot of time traveling.
Retirees who don’t own a car may still need to factor the cost of public transportation into their annual retirement costs. Buses, subways, and other public transportation sources cost older generations $526.80 per year.
3. Healthcare
Americans’ healthcare costs — including health insurance, medical services, medical supplies, and prescription drugs — increase as they grow older. With age comes aching joints, injuries from falling, and sometimes chronic diseases like arthritis, diabetes, or Alzheimer’s. Americans spent an average of $4,976 on healthcare annually between 2016 and 2020, but this is one area where retirees spend more than their younger peers.
People over age 65 spent an average of $6,583 per year, or $548.62 per month, on healthcare from 2016 through 2020. Costs vary from person to person depending on their genetics, injuries, and lifestyle choices. For example, if heart disease runs in the family or you are a smoker, you may want to save extra for retirement healthcare costs.
If you have a high deductible health insurance plan, consider saving with a health savings account (HSA), which offers tax-advantaged savings to cover healthcare costs.
4. Food
Households run by someone age 65 or older spent $6,207 annually, or $517.23 monthly, buying food from 2016 through 2020. Those aged 65 to 74 spent $6,864 per year, and those over 75 spent $5,274. These food expenses include groceries, alcohol expenditures, and meals eaten at restaurants.
An individual’s food costs will vary depending on their diet and habits. For example, people who buy organic vegetables will likely spend more on produce than people who don’t. There’s also a good chance that eating at home more frequently will cost less than eating out five times per week.
5. Entertainment
Having fun isn’t just for the young. From 2016 through 2020, people over 65 spent an average of $2,527 annually on entertainment, or $210.55 monthly, on fees and admissions to places like museums, theater performances, and movies. Entertainment expenses also include hobbies and pet costs.
People aged 65 to 74 spent $3,080 per year on entertainment during the past five years. However, once they hit age 75, spending on entertainment dropped to $1,749 annually, perhaps as mobility decreased.
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What Is the Most Costly Retirement Expense?
Of all of the expenses in retirement, the most expensive is generally housing. While of course exact retirement costs will vary from individual to individual depending on their situation, the average cost of housing even far exceeds costs like health care. As mentioned previously, Americans who are 65 and up spend an average of $16,880 per year on housing-related costs.
There are steps retirees can take to potentially reduce this expense though. For instance, they may aim to pay off their mortgage before they retire. Or, they could consider moving to a less costly state with lower taxes.
What Are Some Unexpected Retirement Expenses?
Even a well-laid retirement plan can leave someone open to surprise. Some unexpected retirement expenses that retirees might want to factor into their retirement planning include:
• Uncovered health care costs: Health care might not cover anything, and to get total coverage, it might be necessary to get multiple plans under Medicare. However, it’s important to weigh the cost of that over any out-of-pocket costs. Of course, it’s hard to predict the future and because of that, it can be challenging to get the math just right.
• Long-term care: This retirement expense can be steep, and the costs involved continue to rise. Especially for retirees who don’t have family to turn to for assistance, this can constitute a significant portion of a retirement budget. It’s estimated in Genworth’s Cost of Care Survey that the average cost for an in-home health aid is $61,776, while a private room in a nursing home facility runs $108,405 on average.
• Unanticipated housing costs: Retirees’ budgets might also get thrown off by housing costs they didn’t factor into their calculations. For instance, while a retiree may have noted the cost of their monthly mortgage payments, they may not have taken into account potential home repairs and maintenance, or needed additions, like a wheelchair-accessible ramp.
What Will You Spend Less on in Retirement?
We’ve talked a lot about the costs of retirement, but there are some areas where you’ll spend less in this stage of life. One place you’ll shell out less is on insurance — Kiplinger estimates that the average retiree spends almost 65% less on insurance, at an average of $2,840 a year, compared to $8,100 a year on average for those under the age of 65. You’ll also likely spend less on taxes, thanks to tax breaks for those over the age of 65.
Other areas where costs might be lower in retirement include on pets and pet supplies; alcohol and tobacco; clothing; and, if you’re giving up your rush-hour commute, transportation.
5 Steps to Set Up a Retirement Budget
Once you have an idea of potential retirement expenses, you can start to save and comprehensively budget for them. Since every retirement looks different, there’s no average retirement budget — a good monthly retirement income for a couple will be different than for a single person. Nonetheless, these are the steps to create a budget that may work for you.
Step 1. Contribute to a Retirement Account
You may already have retirement savings in your company-sponsored 401(k) or a similar retirement plan. But those who don’t have access to a 401(k) or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA. These accounts can provide tax-advantaged ways to start retirement with adequate savings to build a budget.
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Step 2: Make a List of Expected Monthly Expenses
Most expenses can fit into one of three categories: fixed, variable, and one-time. Fixed expenses are payments that occur regularly and stay the same from month to month, like mortgage/rent payments, property taxes, and car payments.
Variable expenses change from month to month, depending on personal usage and price fluctuations. Standard variable costs include utility bills and groceries. Likewise, any entertainment expenses, medical expenses, pet care, and personal care expenses may be variable.
One-time or non-recurring expenses are costs that don’t occur regularly. These might include a new roof, a vacation, or a wedding. You may want to set aside money in an emergency fund for unexpected expenses (like that new roof) and have other funds earmarked for non-essential, one-time expenses (like a wedding or vacation).
To get an idea of your various expenses, gather payment information from bank statements, credit card statements, receipts, and bills. Take a look at what you spend now, then deduct expenses you won’t have at retirement (perhaps you’ll eliminate a car payment or pay off your mortgage). Then you can tally what’s left to get an estimate of your projected expenses and build a line-item budget.
Step 3: Estimate Retirement Income
To get a sense of your potential retirement income, look at projected monthly withdrawals from Social Security, retirement accounts, pensions, real estate investments (like a rental property), and any savings or part-time income. Total them up to figure out what your monthly income will be.
Step 4: Compare Expected Expenses to Expected Income
Ideally, your expected income will be larger than your projected expenses. If this is not the case, you can remedy this issue by reducing costs or increasing income.
To reduce expenses, you may consider downsizing your home or going from owning two cars to one. You may also consider streamlining entertainment expenses as a better way to cut costs.
To increase income, you may consider taking on a part-time job when you retire or look to passive income sources to boost the money that you have to spend during retirement.
Step 5: Figure Out When You Can Retire
Once you know how much money you may need in retirement and how long you’ll need to save to get there, you can plan a realistic timeline for when you can retire.
Keep in mind that the plan will likely change over time as you get closer to retirement, depending on how much you’re able to save and how your retirement goals change. Along the way, it could be necessary to boost your retirement savings if you decide you want to retire sooner than later, or you find you’re not quite on-track for your planned age.
The Takeaway
Budgeting for retirement can feel overwhelming, but taking it step by step allows you to create a plan for a retirement you’ll enjoy. It’s helpful to know the average monthly costs and to know in which major categories retirees regularly spend. You might be surprised by where you need to budget more, or where costs might be lower than expected.
Ready to start saving to cover your retirement expenses? Consider an investment account with SoFi Invest®. Investors can trade stocks, exchange-traded funds, and even fractional shares. SoFi members also have access to SoFi Financial Planners, who can provide personalized insights and financial advice so members can make the most of their retirement savings.
FAQ
What are common expenses in retirement?
Common expenses in retirement include housing, health care, transportation, food, and entertainment. Of course, where you spend — and how much you spend in each category — will vary from retiree to retiree.
What is a reasonable retirement budget?
This depends on a person’s anticipated expenses and the lifestyle they’d like to lead in retirement. That said, the average retiree in America spends $60,593 per year, or $5,049.42 per month.
Which is the biggest expense for most retirees?
The largest cost in retirement is generally housing. Americans who are age 65 and up spend an average of $16,880 per year on housing-related costs.
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