One of the most common misconceptions about retirement people have is that they’ll be spending as much in retirement as they were before. As I detailed previously, retirement spending goes down on an inflation-adjusted basis by 1% per year.
That said, how do retirees spend their money? In today’s post, we are going to discuss the 5 biggest retiree expenses.
- TRAVEL
Travel expenses may quickly add up in retirement, especially in the early years (aka the go-go years). You’ll suddenly have the time to visit places you’ve always wanted to see but couldn’t because you were working and maybe raising children.
One big travel increase that I’ve been seeing is trips within the US where a couple gets out to go travel on the road. Maybe it’s a short trip where you load up your car with your spouse or grandkids for a weekend vacation, or maybe it’s a longer trip going a bit further away..
It’s also important to note that travel companies LOVE selling to near and current retirees. They can’t wait to sell you a nice RV, Airstream, or something similar. RV sales have soared during the pandemic, and while they probably won’t continue that growth, it’s a trend among retirees to travel in style.
In addition to that, there are the more traditional vacations that folks take where they fly somewhere new. And retirees especially, with no 9-5 job to return to, are opting for longer vacations and cruises which of course adds on extra expenses to a normal travel budget.
So if you’ve got a lot on your list in terms of travel, that’s wonderful, just make sure you’ve incorporated the extra expenses into your retirement budget. You can pay for it either out of your monthly cash flow, or you can just have a bucket of money set aside for travel; either option works as long as you’ve planned for it.
- HEALTH CARE
Making travel plans in retirement is a lot of fun. What’s less enjoyable is the fact that we spend more money on medical care when we retire, and those prices continue to rise as we become older.
According to the Employee Benefit Research Institute, the percentage of a household’s total spending on health care rises from 8% in a pre-retirement household to up to 13% by the time a household reaches 85 years old.
This is something that we need to plan for with our finances and have it factored into your retirement plan.
Now if your non-covered medical expenses are significant, grouping them into a single calendar year and claiming a tax deduction is one approach to alleviate the cost.
For tax returns filed in 2021, taxpayers can deduct qualified, unreimbursed medical expenses that are more than 7.5% of their 2020 adjusted gross income. You add those items to your itemized deductions list, so you’ll want to see your other deductions to ensure it makes sense to itemize your taxes instead of taking the standard deduction.
Of course, don’t put off emergency operations, but if you can wait a few days for non-urgent dental treatment or a new hearing aid, you might be able to rack up a high enough expense to qualify for a deduction.
- TAXES
During retirement, your income may decrease, resulting in a lower marginal tax rate and a reduced tax bill. However, if you have a significant amount of money in a retirement plan, such as a traditional IRA, that is subject to required minimum distributions (RMDs) every year starting at age 72, your income and income taxes may increase.
Most seniors receive income from a variety of sources, including investments and retirement-account distributions, and their Social Security payments might be taxed up to 85 percent.
Distributions from a traditional 401(k) or IRA are taxed as ordinary income since the account started with pretax money. Minimum payouts on these accounts are required to commence at the age of 72. Almost all pension benefits are also taxable since they are likely paid out of pretax funds.
Distributions from a Roth 401(k) or Roth IRA, which were funded with after-tax money, are not taxed in retirement as long as the account has been open for at least five years.
And if you have any taxable, non retirement accounts, then you could have to pay taxes on: capital gains (profits from the sale of investments), dividends, and interest you receive throughout the year.
- HOUSING
The greatest expenditure for retirees is housing, which includes mortgage, rent, property taxes, insurance, and repairs. More precisely, the average retiree household spends $17,472 per year ($1,456 per month) on housing, accounting for about 35% of their total yearly spending.
According to a recent report by Harvard’s Joint Center for Housing Studies, 46 percent of homeowners aged 65 to 79 and one in every four persons aged 80 and over are still paying down their mortgage. And according to a survey conducted by American Financing, many people believe they would never be able to pay off their mortgage.
Now you don’t have to be mortgage-free in retirement, although some people do like the certainty that that brings. I’ve dedicated a blog episode to that topic, aptly titled “Should you have a mortgage in retirement?”
Paying off your mortgage and accumulating equity before fully retiring can not only give you immeasurable peace of mind, but it will of course also keep your living expenditures low when you stop working. You will have more breathing room when it comes to other costs if you take that step.
Alternatively, you may consider downsizing your living arrangement because you simply don’t need such a big home in retirement, now that the kids are grown and gone. You also might be able to use the equity from your current home to buy a new place free and clear. I’ve also done a blog on that topic, titled Downsizing Homes In Retirement.
- DEBT
Unfortunately, a number of retirees have significant levels of nonmortgage debt in retirement.
“A 2019 Congressional Research Service report found that the percentage of elderly households—those led by people aged 65 and older—with any type of debt increased from 38% in 1989 to 61% in 2016. The amount owed jumped from about $7,500 to more than $31,000 (2016 dollars).”
If you see yourself approaching retirement, but you still have significant amounts of debt, the first thing I want to encourage you to do is to get help.
It could be from a financial advisor who specializes in cash flow issues, or you could seek out the services of a nonprofit agency that helps people with debt management. One option is the National Foundation for Credit Counseling, which is a nonprofit where you can work with them to figure out the best path to paying off your debt.
I do want to say, if you are still working and have that debt, I’d encourage you to keep working until you can pay off those debts because it’s simply going to be so much harder to do that when you are in retirement. You simply have a bigger shovel when you have earned income than you do when you are living off of your investments, social security, and maybe a pension.
CONCLUSION
So we’ve covered 5 of the biggest expenses in retirement. As I’ve said before, make sure to have a PLAN in terms of how to pay for these expenses.
For travel, are you going to take it out of your monthly cash flow, or set aside a separate account for it?
For taxes, do you have a plan to lower your lifetime tax bill? Or are you just going to wing it?
And the same is true for the other expenses mentioned above, if you have a plan for it that you are confident in, then you are in good shape. And if you don’t have that plan, I’d encourage you to get one.
If you’re interested in developing a retirement plan with me, I’d be happy to help. Just go to StartMyRetirement.US and we can work together to create you a one page retirement plan outlining everything you need to do to have a comfortable retirement.