Typical Retirement Expenses to Prepare For Like a Boss

Sleeping in until noon. Spoiling the grandkids with gifts and freshly baked cookies. Traveling around Western Europe to sip wine and eat croissants. Many people dream about how their retirement years will play out. These goals are 100% attainable—as long as retirees have saved enough during their working years.

Unfortunately, not all Americans know what to expect when it comes to the cost of living during their retirement years, and they may not know how to budget for typical expenses in retirement like housing and transportation. It can be difficult to transition from a saving mindset to spend, once you’ve stopped working.

Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend, how much they need to save for retirement, and figure out when they can retire.

Average Retirement Expenses

According to the Bureau of Labor Statistics,

Americans aged 65 and older spend an average of $48,106 per year or $4,008.83 per month. More specifically, those aged 65 to 74 spend $52,928 annually, while spending drops for people aged 75 and older spend to $41,471 annually.

Retirees typically spend less than the American average, which is $61,749 per year, or $5,145.75 per month. Retirees even tend to spend less than people nearing retirement-aged 55 to 64, who spend $66,139. The typical budget for a retired couple needs to cover that amount every year for a retirement that could stretch over two or three decades.

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Drilling down to specific categories can help retirement savers determine benchmarks for their own budget.

Housing and Living Expenses

Housing and living expenses, such as mortgage payments, insurance, and maintenance costs, are typically among the highest costs retirees will face.

In 2021, Americans aged 65 and older spent an average of $4,847 annually on housing-related costs, including property tax, maintenance, repairs, insurance, and other expenses. On average, utilities, fuel, and public services cost an additional $3,743, and miscellaneous costs related to household operations were another $1,219. Renters spent an average of $2,471 per year on their dwellings.

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 cooler real estate market in a state with relatively low property taxes, such as Wyoming, South Carolina, or Colorado.

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 major factor in retirement expenses, especially early in retirement.

Americans spend an average of $10,160 per year getting from point A to point B, but retirees spend a little less. Those over age 65 spend an average of $6,618 annually on transportation or $551.50 per month. People aged 65 to 74 spend $7,851 per year, and people 75 and older spend $4,963 per year. These numbers cover everything from buying a car to filling up the gas tank to purchasing a bus pass and could be significantly higher for those who spend a lot of time traveling.

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Retirees who don’t own a car may still need to factor the cost of public transportation into their annual retirement costs. Buses, taxis, and trains cost older generations an average of $441 per year.

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. On average, Americans spend $5,204 on healthcare per year, but this is one area where retirees spend more than their younger peers.

People over age 65 spend an average of $6,719 per year, or $559.91 per month, on healthcare. Those aged 65 to 74 pay $6,792, and people aged 75 and older spend slightly less—$6,619.

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 specifically.

Food

People over age 65 spend $6,303 annually, or $525.25 monthly, buying food. Those aged 65 to 74 spend $6,992 per year, and those over 75 spend $5,294. This includes both foods at home and restaurants and fast-food chains.

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.

Entertainment

Having fun isn’t just for the young. People over 65 spend an average of $2,282 annually on entertainment, or $191.16 monthly, on fees and admissions to places like museums, theater performances, and movies. Entertainment expenses also include hobbies and food, and toys for pets.

People aged 65 to 74 spend $2,556 per year. However, once they hit age 75, the amount they spend on entertainment drops to $1,889, perhaps as mobility decreases.

4 Steps to Set Up a Retirement Budget

Once you’ve got an idea of what your retirement expenses will look like, you can start to save and budget for them in a comprehensive way. Since every retirement looks different, there is no average retirement budget, but these are the steps to create a budget that works for you.

Here are some easy steps to take to get a head start on your retirement budget so that you know how much you need to save.

Step 1: Make a List of Expected Monthly Expenses

Most expenses can fit into one of three categories: fixed, variable, and one-time. Fixed expenses are things like mortgage/rent, property taxes, and your car payment.

Others, like some utility bills, might be variable, changing from month to month. Likewise, any meals and entertainment expenses, medical expenses, pet care, and personal care expenses may be variable.

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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 some money aside for unexpected emergencies (like that new roof), and have other funds earmarked for non-essential, one-time expenses (like a wedding or vacation).

Gather this 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 by then). Tally what’s left to get an estimate of your projected expenses and create a line-item budget.

Step 2: Estimate Retirement Income

Take a 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 3: Compare Expected Expenses to Expected Income

In an ideal world, your expected income will be a larger number than your expected expenses. There are two ways to reconcile expected retirement expenses with expected retirement income: Either reduce expenses or increase income.

Is downsizing a possibility? What about going from two cars to one? Perhaps streamlining entertainment expenses? On the other hand, increasing the amount you save can help bring anticipated retirement costs and retirement income into balance. Or, you may consider taking on a part-time job when you retire to increase your monthly income.

Step 4: Contribute to a Retirement Account

You may already have retirement savings in your company-sponsored 401k plan or a similar retirement plan. But those who don’t have access to one or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA.

The earlier you start saving, the better, so you can take advantage of the power of compound interest, the returns you earn on your returns. Let’s say you make an initial investment of $1,000 into your IRA and add $100 each month for a year. At the end of the year, you’d have $2,200, right?

Not so fast. You may have contributed only $2,200 to your IRA, but if your account earns an average rate of 8% compounded annually, you have actually saved $2,280.

Compounding interest grows exponentially. After five years, you’ve contributed $7,000 to your account but saved $8,509.25. After a decade, you’ve contributed $13,000 but saved $19.452.80.

Step 5: Figure Out When You Can Retire

Once you know how much you need and how long you’ll need to save to get there, you can make a plan for a realistic timeline for when you can actually retire. Keep in mind that the plan will likely change over time as you get closer to retirement, depending on how much you can save and how your retirement goals change.

4 thoughts on “Typical Retirement Expenses to Prepare For Like a Boss”

  1. Hi Steve,
    Thank you for the quick reply!
    I read someplace, if you stick to a simple annuity (?) it can be a good stable source of retirement income. (I don’t require much tho)
    I too have a student loan debt (chiropractic) that will reach $100,000 in 4 years. Fortunately, at that point, 25 years will have elapsed since I consolidated (BIG mistake!) and so I can request the debt will be “forgiven”; at that point I will be subject to some tax liability, but that’s OK…
    My social security is not that much (or, will be not that much, maybe $1000 or so)
    And, I will eventually be gifted (inheritance) a substantial amount of money, currently held in trust. (Because of the student loan debt). About $400.000.
    Therefore, I am considering an annuity, or something else. Just exploring, that’s all!
    Thank you again. I appreciate your kind and helpful advice to all of us.

    Reply
    • Here is where the struggle is for me. If I was a salesperson that sold annuities I’d be all over trying to sell you something I made a commission on. But I’m trying to give you the best possible advice and put you first. Ultimately the best answer is the once that makes the most “cents” and you feel comfortable with.

      Reply
  2. Hi Steve,
    I have been an appreciative reader for years now. Do you have any comments about annuities? Is this something you recommend?

    Reply
    • Hi Aurora,

      At one point in my life, I was a registered investment advisor. What I learned was I didn’t find a lot of that very fun. I find annuities to be complex and perplexing. On one hand, they can provide you with guaranteed income but I find the rates of return to be not great.

      This post has a lot of good information in it. https://www.creditkarma.com/advice/i/annuities-pros-cons

      Each person has to decide what approach and investment type is best for their needs and personality. For some, a guaranteed low rate of return is comforting because they know a check will be coming every month. For others, a higher rate of return with more risk is the better target.

      I hate to give you the impression I’m waffling on answering your question but it is surprising how such a great question can have such a complex set of circumstances to answer it.

      Why are you considering an annuity? Is someone trying to sell you one?

      Steve

      Reply

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