One of the more difficult aspects of retirement planning is determining how much your golden years will cost.
There are all kinds of rules of thumb about what percentage of your income you have to replace. I’ve seen as high as 130% of your working life income to as little as 70%.
If you have followed me for any amount of time, you know I don’t like rules of thumb—and when you consider that 60% spread, I’m sure you can understand why.
Planning becomes even more difficult with the realization that certain expenses increase early in retirement, some decrease over time, and other costs—health care costs, in particular—increase as we age.
One of the few reliable sources of information about the cost of retirement comes from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. It tracks 14 categories of spending for both working and retired households.
The BLS’ numbers don’t give you a replacement percentage or a total amount you should hold in retirement savings, but they do a good job of identifying where the increases and decreases in spending occur after we step away from the work world.
Retirement Expenses: Areas Of Spending
The BLS reports that the largest percentage spending decrease in retirement is in money spent on education. According to the Bureau, the average working household spends $1,639 on education per year. In retirement, that drops to $350—a 78.6% decrease.
That’s not a significant amount of money, but where we do see a big drop in both the percentage and the dollar amount is what we put aside in Social Security and private retirement accounts.
The survey reports that the average family stocks away $8,098 per year while working. This category shows a big drop of 64.9%, or $2,840 per year on average, in retirement.
We also see a 47.2% drop in apparel and services.
Transportation spending also decreases significantly—by 30%. Most of that is attributed to eliminating commuting costs.
Spending on food, entertainment, and personal care products show smaller drops between 24% and 13%.
Where we do see a significant increase is in health care. The BLS survey reports a 43% increase in spending in this category. During our working years, the average household spends $4,174 per year on health care. That increases to $5,994 in our later years.
Keep in mind that the health care costs above are an average.
The biggest increase in a single area of spending, though, was a surprise: We spend 71% more on reading materials in retirement. It’s not a huge amount, but still noticeable—$101 per year while we’re working compared with $173 per year in retirement.
It seems we have more time to sit back and enjoy a good book in our golden years.
Spending in nearly all categories declines as we age. The exceptions are housing, which remains steady, and health care expenses, which, as I said, really take off in our later years.
Total spending, according to the BLS, is not on a straight line either. Between ages 55 and 64, annual spending averages $65,000. Between the ages of 65 and 74, it drops to around $55,000 per year, and, after that, the average drops to $42,000.
Of course, all these numbers are a function of what you plan to do in retirement and what kind of lifestyle you expect to maintain. These percentages can be higher or lower depending on choices you make.
You can use the BLS’ percentages to develop a good guesstimate of your own costs, but the key to a successful retirement hasn’t changed: Put aside as much as you can now during your working years.
Increases and decreases in spending mean nothing if you run out of money.