We have some good news for people who are worried that they haven’t saved enough for retirement: You may not need quite as much as you think.
Many retirees actually end up spending far less in retirement than they did when they were working. Three years into retirement, people report spending roughly 66% of their pre-retirement income, a 2014 survey by T. Rowe Price found.
Even more encouraging was that 85% said they didn’t need to spend as much as they did previously, with many reporting that they were living just as well as they did before retirement and that they enjoyed the feeling of not having to “keep up with the Joneses.”
Still, the news that retirement might be a little cheaper than you anticipated is no reason to stop saving, especially since health care costs and other expenses can spike as retirees age. And not every retiree ends up spending less once they stop working, of course.
“The initial phase of retirement can be as expensive, if not more so, than working life,” certified financial planner Eleanor Blayney told the Wall Street Journal. That’s because new retirees may indulge in expensive hobbies, take big vacations, or splurge on luxuries like a new RV or boat. Even small things like eating out a bit more frequently or spending more time at the mall can end up putting a hole in your retirement budget.
For many retirees, however, that increased spending on fun things is balanced by being able to drastically reduce or even eliminate other expenses. Here are five areas where you’ll likely spend less money after you retire.
One big reason you might need less income in retirement than while you’re working? No more need to save. For that past few decades, you’ve probably been saving anywhere from 5% to 20% of your income for the future. Well, now that future has arrived.
Financial experts often suggest that retirees should plan on needing to replace about 80-85% of their pre-retirement income once they stop working. That number – which may be high for some people, as the T. Rowe Price survey suggests – is partially based on the assumption that you’ll no longer be diverting a portion of what you earn to savings. Plus, you also won’t have to pay Social Security and Medicare taxes (unless you have a part-time retirement job), which saves you an additional 7.65%. So, even if your day-to-day spending doesn’t change much in retirement, your income needs shrink, since you have more money available to spend today.
The average American worker spends 4.1% of their income on commuting, according to research by the Brookings Institution. Eliminating those expenses could save you more than $2,800 per year if your annual salary is $70,000.
You’ll save even more if you can downsize to one car. Owning a car costs the typical driver $8,698 per year, according to AAA. An even better option might be to cut your transportation expenses before retirement, perhaps by driving less, buying or leasing a cheaper vehicle, or avoiding an expensive car loan. That will allow you to save even more for the future now and will mean less dramatic lifestyle adjustments once you do retire.
You may be able to shave thousands of dollars off your annual retirement budget by controlling your housing costs. In particular, paying off your mortgage before you stop working can save you big.
“On average, the monthly housing costs (including property taxes, insurance, and utilities) of older adults owning their homes free and clear are less than a third of those for older owners with mortgages and less than half of those for renters,” according to a 2014 report by the Joint Center for Housing Studies of Harvard University.
Many retirees also end up downsizing to a smaller home or moving to an area where housing costs are cheaper, both moves which can save you money.
4. Clothing and personal care
Being retired doesn’t mean you have to dress like a slob, but you probably will be able to cut how much you spend on clothing, dry cleaning, and related expenses, since you’ll no longer be heading into the office every day.
The average American spends about 3% of their income on apparel, according to the Bureau of Labor Statistics’ Consumer Expenditure Survey. But people over age 65 spent about $500 less per year on apparel than those between the ages of 55 and 64 ($1,022 a year versus $1,563). Spending on personal care also dips slightly for people of retirement age, to $563 annually from $638 for those in the 55-64 age group.
Your insurance needs will change once you stop working. Most retirees will drop disability insurance coverage, since those policies are designed to replace your income if you’re no longer able to work – not an issue if you’re already retired.
Life insurance may be another coverage you can drop once you stop working. The main purpose of this coverage is to replace your income and support your family if you die unexpectedly. But if you and you spouse have saved diligently and have no one else who’s depending on your income, the coverage may be superfluous. There are some situations where retirees might need or want life insurance, however, so you should talk to your financial adviser before you cancel your policy.
Your employee contributions to health insurance will also disappear in retirement, though the savings there might not actually be that great depending on your Medicare premiums, co-pays and deductibles, and other costs.
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