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Latest Data About The Real Cost Of Living In Retirement 

Brendan Pedersen, Cost Of Living In Retirement

With Brendan Pedersen, staff writer for Kipling’s Personal Finance

Steve spoke with Brendan Pedersen, staff writer for Kiplinger’s Personal Finance, about retirement expenses, a subject he recently wrote an article on. Brendan offered his insight, based on research and compiled data, on how much you can reasonably expect to spend once you reach your retirement years.

Transportation Expenses In Retirement

There’s good news as far as transportation expenses in retirement goes—you’ll likely be spending less. One of the biggest reasons?  No more daily commute to and from work. The amount of money you save on transportation costs can be quite significant. The average working household spends almost $10,000 every year on transportation. This drops to around $6,800 for the average retired household, according to the Bureau of Labor and Statistics.

Clothing Costs In Retirement

Clothing is another area where retirees tend to scale back and save. Working people need to stay on top of dressing for success; but in retirement, you can pretty much hang up your stiff-collared shirts. The average working household spends about $2,000 per year on apparel, while the average retired household spends just over $1,000, essentially slashing the clothing budget in half.

Grocery Shopping

Groceries are another significant area where retirees cut back. The average household spends about 25% less on food in retirement. How? Well, the number one way is shopping around for discounts. Retirees tend to have more time on their hands. They tend to spend more time at the grocery store or multiple grocery stores, price checking, and looking for the best deals.

You’re also not usually spending as much money eating out. For example, you don’t have to purchase lunch at a fast food place when you’re not taking a lunch hour at work.

Housing Costs In Retirement

Housing in retirement is a spending category where many retirees are saving money. Most retirees end up selling their larger homes, the ones they needed to take care of their families, and downsizing to smaller homes with smaller mortgages. In fact, about 80% of people age 75 and older are mortgage free.

The average annual housing cost for individuals 55 to 64 is around $18,000. In retirement (individuals from ages 65 to 74), that number drops, on average, to $16,000. After age 75, it’s down to about $14,000.

Spending More In Retirement

There are some areas where you’ll likely be spending a little more in retirement. One increased expense area is vacations, as retirees take all those trips to the places they always wanted to go.

Healthcare is perhaps the biggest area where you’ll likely see a major uptick in spending. The Employee Benefit Research Institute found that the average household’s healthcare costs roughly double from pre-retirement levels to age 85. This includes not only the cost of insurance, but medications, emergency healthcare situations, hospitalizations, and even in-home specialty care.

To learn more about the cost of living you can anticipate in retirement, check out Brendan’s article, “10 Things You’ll Spend More on in Retirement”.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: I spend every day helping clients plan for and navigate retirement, and the question that comes up the most is, “Will I be spending more or less in retirement than I am currently spending as a working individual?” Of course, there is no yes or no answer because we’re all so different; however, there is a body of statistics we can use to get a good general sense of the costs, some lower, some higher. Writing about this for Kiplinger Magazine is Brendan Pedersen. He’s a staff writer for Kiplinger’s Personal Finance. Welcome to the program, Brendan.

Brendan Pedersen: Thanks for having me, Steve. Good to be here.

Steve Pomeranz: Let’s start with those things that you’ll spend less money on. Number one, transportation. Tell us about that.

Brendan Pedersen: Sure. Would be happy to. I also want to give a quick shout out to the person who helped me report this story last year, that’s Sarah Smith. She was an intern with Kiplinger who did a lot of work with me on this story, so I want to give credit where credit is due.

Steve Pomeranz: Beautiful.

Brendan Pedersen: But as far as transportation goes, yes, for many people, one of the biggest reasons they’ll want to retire, at least in terms of day to day aggravation, is saying goodbye to those rush hour traffic jams and long commutes. That’s one of the big reasons that people go for retirement. The average worker spends like an hour a day every day commuting, and the time spent traveling to and from work is only increasing every year.

But it’s not just the aggravation that you’re saving, it’s also money. Before retirement, the average working household spends up to $9,800 every year on transportation. That number drops to $6,800 for the average retired household.

Steve Pomeranz: Yeah. Pretty significant.

Brendan Pedersen: It’s a 30% decrease in household spending, and that’s according to the Bureau of Labor Statistics.

Steve Pomeranz: Okay, so there’s $3,000 bucks right there. What about clothing? I mean, working people have to buy nice clothes, we have to get them dry cleaned. Do clothing bills come down as well?

Brendan Pedersen: Right. I mean, you are supposed to dress for success when you are in the workplace, but when you’re retired, you can actually put the stiff collars and high heels in your closet, and you’ll save money from that. The average retired household spends about $1,100 a year on apparel, while the average working household is spending more than $2,000.

Steve Pomeranz: Okay.

Brendan Pedersen: And also a factor is, of course, dry cleaning. Some people can spend up to a thousand dollars a year in some metropolitan locations, but in less urban areas you’ll save some money.

Steve Pomeranz: Absolutely.

Brendan Pedersen: Of course, it is worth noting, though, when you come out of the workforce for the first time in a while, you probably had a lot of work casual clothes saved up, but you might need to spend some more money on having clothes that you are comfortable in.

Steve Pomeranz: Yeah. Yeah.

Brendan Pedersen: There’s CFP named Rita Chang who is based in Maryland and she says she always sees spikes in spending from recently retired people who need to update their casual wardrobes after they’re out of the workforce.

Steve Pomeranz: Yeah, of course. You’re going to amortize that over probably 25 years. You’re probably not going to be changing that wardrobe too much, so it might not be quite that savings that you think.

What about groceries? Are you spending less for groceries as a retired person?

Brendan Pedersen: Well, it’s funny because, in theory, you’re not eating more as a retiree. In fact, if anything, your appetite lessens as you age. But a huge component of spending money on food is convenience and time, right? The fact is the average household spends 25% less on food in retirement. There’s a couple of academics named Eric Hurst and Mark Aguar from University of Chicago and Princeton, respectively, and the logic is simply that you have more time to shop when you’re retired. If you’re not in a hurry at the grocery store, you’re more likely to compare prices on similar products, use coupons, and do more meal prep and planning meals ahead of time. You’re also not buying food between meetings or as you drive in for work. When it comes to dining out, specifically, the drop is even sharper. It’s like 35% less. Even though you might have these visions of fancy steak dinners and brunches in your retirement, people manage to do that and still spend less money just by kind of cutting out these convenience costs.

Steve Pomeranz: Well, I have to tell you, not in my area. Not in Boca Raton, Florida. I mean, it’s a second career.

Brendan Pedersen: Well, yeah, I mean, if you’ve been living in the suburbs for a little while and you end up retiring to an urban location because you were trying to consolidate space and live with some more amenities, that’s not uncommon. You’re going to spend more money in an urban area.

Steve Pomeranz: You know, I think maybe you’re also shopping less down the middle aisles, the more packaged stuff, and maybe you’re spending more time preparing your meals at home, maybe cooking with fresher vegetables and kind of shopping the outside perimeter of the store rather than the inside with the packaged areas. That may save you something. Interesting.

Brendan Pedersen: Yeah, I think that’s a great observation. I think it sounds like you eat healthier and you’ll spend less on the money when you are retired, which is pretty cool.

Steve Pomeranz: What about your mortgage? I mean, so many people … your statistics here, 82-and-a-half percent of Americans 75 and older are mortgage free. How does that balance out for those who are in their sixties and so on?

Brendan Pedersen: Right. So compared to that 80% number for 75-year-olds and up, about 62% of Americans who are of retirement age but underneath 74, so 65 to 74, they don’t have mortgage debt either. So that’s a smaller pool, but that’s still a lot of people who have paid off on that pretty huge loan.

But at the same time, housing costs certainly don’t disappear entirely when you’re in retirement. Even if you’ve paid off your mortgage, you’re still spending money on home maintenance and you’ll incur moving costs if you want to downsize or relocate. But still, the average annual spending on housing for Americans who are between 55 and 64, right before you retire, is about $18,000, but once you’re retired, it goes down to just under $16,000 for those who are between the ages of 65 and 74. And by the time you’re over the age of 75, you’re spending less than $14,000 a year on housing, according to the Bureau of Labor Statistics.

Steve Pomeranz: There’s this rule of thumb, and we don’t use it, but this 80%, you spend 20% less in retirement than you do when you were working. Is that a high number or a low number relative to the broad statistics?

Brendan Pedersen: Oh, that’s tough because like you mentioned in your intro, it really can vary so much, and a lot of it depends on what your personal retirement objective goals are and what income you wanted to have versus how your portfolio aged in the last 10 years or so. It really can vary, but it’s not a bad rule of thumb at all.

Steve Pomeranz: I’m speaking with Brendan Pedersen, he’s a staff writer for Kiplinger’s Personal Finance. We’re talking about the costs of retirement and are you spending more or less than when you were working? Let’s talk about the other side of the coin, spending more. Some of the things that you might spend more on. For example, travel. I think that would be something you would definitely spend more on. True?

Brendan Pedersen: Absolutely. I think even though you might not be commuting to work as much as, that’s one thing we mentioned earlier on, traveling and seeing the world is a touchstone of retirement for a whole lot of people. Whether you’re trying to pack in some luxury cruises or do weekend getaways with your grandkids, you’re going to be moving around in retirement, especially in your early retirement. Compared to working people, retirees are opting for longer and longer cruises, for instance, they made more destinations according to Colleen McDaniel, who is a senior executive editor of Cruise Critic.

Steve Pomeranz: Okay, fair enough. What about health care? That’s a big one. Tell us about that.

Brendan Pedersen: Yeah, that is one of the biggest upticks you’ll see in cost. And that’s not a big surprise, right? We spend more money on medical care as we retire. The Employee Benefit Research Institution found that the percentage of household total spending on healthcare goes from 8% in pre-retirement households, writ large, to almost 20% by the time a household is past the age of 85 in terms of averages. That’s coming from unpredictable and costly diagnoses and hospitalizations. And overall spending is going to rise for general health needs like prescription medicine, your insurance, and other services. So that’s something that’s unavoidable.

Steve Pomeranz: So some of these rising costs like healthcare will offset some of the declining costs, and it’d be interesting to see for each individual what kind of the average is. I think it’s a savings. I think you’re spending less in retirement. You know, when we calculate whether people have enough money for retirement, we don’t do a discount. We may put a bump in there for higher healthcare spending, but we project that out at an inflation rate going until the 90s. And that’s unrealistic, but we do that to be super conservative to make sure that we’re kind of overestimating things. But I know that just people as they age, they do spend less, they go out less, and so on.

What about day to day expenses? We’re just running out of time. Let’s take that as the last one.

Brendan Pedersen: Sure. Yeah, so as people transition into retirement, especially in the early stages, most people’s lives aren’t radically altered. You might still drive out to meet friends or associates or go grab coffee from around the corner or use your laptop to do work from the comfort of home. The things that do tend to change after you leave the workforce, however, is who is picking up the bill for a lot of the small stuff like lunches or parking or cell phone bills or even coffee. I mean, my God, when I worked from home after working in an office after I graduated college, the amount of money that I spent, even just on buying packages of ground coffee beans was significant. I got my money’s worth of coffee from my old employer.

Steve Pomeranz: Yeah. No, you know, also if you owned a small business, how much of those expenses were built into the business expenses?

Brendan Pedersen: Exactly. It’s a lot. And you can write a lot of that off. A lot of people tend to be surprised by just how many of those little expenses that their company might’ve picked up, either their own or their employer, but that’s something that you get used to over time, generally speaking.

Steve Pomeranz: All right. Cool.

Brendan Pedersen with Kiplinger Personal Finance. For all of you, it’s just really a question of sitting down and trying to get your budget together and figure out what do you think your spending is going to be, and then as the year goes by, you’re going to check that against your actual projections and see where you are. And if you constantly monitor it, keep on top of it working with a financial planner or some kind of an advisor that can help measure whether you’re spending too much or even not enough, which we see a lot here in Boca Raton, by the way. People can spend more, but they don’t out of fear. Long story short having information like this is pretty important to you.

We will put this link, a link to Brendan’s article on our website which, of course, is stevepomeranz.com, where we’d love you to visit and ask us a question. We’d love your questions as well. Remember that, stevepomeranz.com. And while you’re there sign up for our weekly update where you’ll hear all about our live events as well as read a transcript of what we’ve discussed here or a summary or actually listen to the audio itself. That’s stevepomeranz.com.