Retirement Spending: How Your Expenses Will Change

retirement spending Your retirement spending will evolve…

Retirees expect that their expenses will change once they retire, but they may under-estimate just how much they will change, and in what spending categories. Overall, your spending is likely to decline once your retire, but spending may increase for part of the time and not all areas of your expenses will see the same changes.

To help take some of the guesswork out of retirement planning, here are some ways you can expect your largest expenses to change in retirement:

The Stages of Retirement and How They Impact Your Retirement Spending

Your retirement is probably going to last 20 or 30 years.  Have your expenses been the same in the last 20 years?  Probably not.  Similarly, your expenses are going to evolve throughout the next 20 years.

But don’t worry, your retirement spending won’t be a roller coaster.  It is widely accepted that there are three stages of retirement.  Each stage has fairly predictable spending needs and levels.

Phase 1 – Early Retirement: The first stage of retirement, especially these days, is generally characterized as a time of adventure and experiences.  Many retirees start retirement with travel, hobbies or helping grandchildren (or their own aging parents).  These activities can be expensive.  With more free time and relative health, there are a lot of opportunities for spending money.  While some experts recommend that retirees budget for spending 20 percent more in this phase, we think that you should assess your own projected spending.

You may also want to consider that some retirees off set increased spending in phase 1 with a retirement job.  Many people find work in an area that they enjoy — either part or full time.

Phase 2 – Middle Retirement: While you may still be enjoying adventures in middle retirement, many people find that they simply spend more time with friends and family and stay a little closer to home.  In this phase, your retirement spending may be at its lowest levels.

Phase 3 – Later  Retirement: No matter how healthy you are and how well you age, there is no denying that health care expenses ramp as you get older.  In fact, healthcare costs grow so much that this last phase of retirement is usually the most expensive phase of life.  Out of pocket medical spending and long term care costs absolutely sky rocket.

Tips for Your Retirement Plan: To best plan for these various spending levels, you will want to use a retirement calculator that allows you to set different budgets for different time periods.  After an initial assessment, the NewRetirement retirement calculator let’s you set time periods with different spending and different expense levels.  This will give you a much more accurate retirement plan.

Retirement Spending on Health Care

Healthcare is getting more expensive and you need it more as you age.

Before you hit retirement, do some research on out of pocket healthcare spending and on  your options for long-term care insurance.

The average American couple retiring today can expect their health care costs to more than double by the time they turn 85, according to a 2015 report by HealthView Insights, a national producer of health care cost-projection software.

“The couple can expect to spend $583 per month during their first year of retirement,” the report finds. “This monthly expense is probably close to what they would be accustomed to paying if they were enrolled in an employer-sponsored plan. However, this number will more than double by age 85.”

Tips for Your Retirement Plan: Healthcare costs can be difficult to predict.  However, there are a few things you can do:

  • Re evaluate your Medicare Supplemental Insurance once a year.  These plans change and your health needs evolve.  You can likely improve coverage and/or decrease costs by shopping around.  Compare policies here.
  • Be sure to assess how you will fund long term care if you need it.  The NewRetirement retirement calculator lets you see the impact of different strategies for dealing with long term care.  After your initial retirement plan assessment, you can see what happens if you purchase insurance, use an annuity, fund the care out of pocket and more…
  • Your retirement plan should definitely account for the rising costs of healthcare.  The NewRetirement retirement calculator enables you to set your own projected inflation rate for healthcare costs.

Retirement Spending on Housing

When it comes to one of your biggest expenses (housing), there could be some good news for your financial plan later in life. Housing is expensive, but you generally need less of it as you age.

  • If you own your own home, you could see your average housing costs drop by the time you retire if you’re able to pay off your mortgage.
  • You could also move into a smaller home or into an area with lower property taxes that could reduce your overall housing expenses.
  • However, housing expense can also increase if retirees decide to move into senior housing.
  • A reverse mortgage is also a way that you may reduce your housing cost or generate cash flow if you have enough home equity and can qualify based on your age and financial factors.

Tips for Your  Retirement Plan: Planning ahead for where you want to live can help you better calculate what your housing expenses will be in retirement.  Housing is the most valuable asset for most households.  As such, you may want to consider using it to help fund your retirement.  When you use the NewRetirement retirement calculator, you can see what happens if you pay off your mortgage, downsize or get a reverse mortgage.

Retirement Spending on Transportation

Transportation is typically the second largest expense for most families, according to the Federal Highway Administration. Once you leave the workplace permanently, you could end up saving a lot on daily transportation needs, especially if you were spending a lot to commute to and from your job. If you end up driving less, you’ll not only save your gas money, but you could also end up saving money on your insurance and maintenance, significantly reducing your transportation expenses.

Plan for Changes in Retirement Spending

Your expenses are likely to change in retirement, but they don’t have to derail your financial plans. By accounting for some of these changes early, you can combat some financial surprises down the road and maybe even discover that retirement won’t be as expensive as you fear.

If you want to know how your retirement spending will impact your retirement security,  the NewRetirement retirement calculator is a good place to start.  This tool was recently named a best retirement calculator by the American Association of Individual Investor’s (AAII).


How will your expenses change in retirement?

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