So far in our series on retirement expenses, we’ve discussed the retirement smile, which researchers discovered after analyzing thousands of retired families and tracking their expenses. We learned that on average, the typical retired family has three different stages of spending in retirement, and we also learned that retirement expenses typically go down, when adjusted for inflation, on an overall basis.
Our most recent blog was on the top 5 expenses in retirement, and even some expenses that may go up in your retirement.
Today, we’re going to focus on 5 expenses that might be down in your retirement.
For most retirees, your overall income in retirement will be less than what it was while you were working, but there will be the elimination of some costs that might easily make it feel like you’re getting a bonus.
Let’s take a look at some of the big expenses you can say goodbye to once you enter your retirement.
- TRANSPORTATION COSTS
The irony of working is that many individuals spend a significant amount of money simply to get to work each day. The expense of gas for a commute might add up to hundreds of dollars every month.
That doesn’t even account for the wear and tear on a car, let alone the costs of routine maintenance. A person who commutes 20 miles each way every day might easily expect to spend $50,000 on gas every ten years.
Ending a commute in your retirement will be quite a positive benefit, both for your finances and your lifestyle. According to the Bureau of Labor Statistics, the average working household spent $9,761 each year on transportation. That number drops to $6,814 for the average retired household, a 30.2% decrease.
So by the end of your first year of retirement, you’ll most likely be spending a few thousand dollars less than you were just the year before.
- CLOTHING COSTS
For retirement, there is no dress code. This is great news for people who have spent years conforming to tight dress codes requiring certain shirts, suits, and shoes.
Furthermore, dry cleaning costs can add up to a significant amount of money over a year.
The average retired household spends $1,070 on clothing each year, compared to $1,866 for working households. Also, consider the money you’ll save on dry cleaning (which may cost up to $1,000 a year in big urban areas).
- LIFE INSURANCE PREMIUMS
For many retirees, life insurance isn’t an essential expense. The most important reason to have life insurance is to replace one’s income in case of an untimely death. You want to know that if you die, your family will be able to cope and will not face excessive hardship.
Many people don’t have dependents in their household by the time they retire. This means that paying for premiums isn’t essential. If you pass away, will your spouse be able to live off of the retirement savings, assets, pensions, and social security benefits that they will receive? If so, then life insurance isn’t necessary.
Now if you just have a certain comfort level keeping your insurance policy in place, as long as you can afford it, that’s your choice. But as long as your spouse/family members will financially be okay with the cash, investments, home equity, and other assets that you have, then most likely you just don’t need that life insurance policy and you can save yourself those annual insurance premiums.
- RESTAURANT BILLS/EATING OUT
This is a really interesting thing that I found out when researching this episode. According to two professors, Erik Hurst and Mark Aguiar, total spending on food fall by 25% in retirement, and spending on dining out at restaurants fall by 35% in retirement.
The professor’s hypothesis is that because you have more time in retirement, you’re more likely to cook for yourself as opposed to going to a restaurant. That makes sense and was what I expected. When you are working 40-50 hours per week at a stressful job, it just makes sense that people would be more likely to grab a coffee on the way to work, pick up lunch near work, or pick up something on the way home for dinner.
But beyond that, with this surplus of time, retirees not only skip takeout more often, but they are more prone to look for good deals (like clipping those coupons) at grocery stores and then cooking at home.
- SOME TAXES – DEPENDING ON YOUR STATE
Some states are more tax-friendly others and if you’re retired or about to retire, three forms of state taxes—income tax, property tax, and sales tax—interact to identify the most tax-friendly states.
The best resource that I’ve come across to identify what your taxation will be is the Tax Foundations Tax Data By State. When you go there, you can see what the tax situation is in your current state, and then compare it to a state that you’d like to move to.
Some things to consider for your state taxes are:
-Is there a state income tax?
-How are capital gains taxed?
-Is it included as ordinary income or is it lower?
-How are social security and pension income taxes? Some states let you deduct those forms of income from your state tax, while others don’t.
There are almost seven states that don’t impose an income tax: Alaska, Nevada, Florida, South Dakota, Washington, Texas, Tennessee, and Wyoming. New Hampshire onlys tax dividend and interest income..
However, states without an income tax may appear to be a desirable option, but many collect revenue in other ways. They may levy high property or sales taxes, which might readily compensate for the absence of an income tax.
Most states that impose an income tax enable retirees to deduct part or all of their Social Security and pension income from their taxes.
Pension income is completely tax-free in twelve states for eligible retirees. These states include Alaska, Florida, Mississippi, Illinois, Nevada, South Dakota, Tennessee, Washington, Wyoming, Pennsylvania, and New Hampshire.
CONCLUSION
We have covered a lot again today, in going through 5 ways that your retirement expenses may not be as much as you had planned for. If you want to make sure that you plan properly so that your tax expense in retirement will be less, go pick up a copy of my book The Retirement Tax Bomb.