Average Retirement Spending: Will You Spend a Lot More or Less Once You Retire?

Average Retirement Spending: Will You Spend a Lot More or Less Once You Retire?

Do you actually know how much you spend every day now? What about every week? Throughout your life, you have probably at least looked backward to assess how much you have spent, even if it is just a running tally in your head. However, figuring out much you will consume in the future can be a lot more complicated.

retirement spending
How much money will you be spending in retirement?

Do you have any idea of what your average retirement spending will be over the 20 to 30 years you will be living a life of leisure?

The odds are that you probably haven’t quite yet figured that out. However, you need to. How much you want to spend is the key determinant to a huge number of important retirement planning questions: how much savings you need, how those savings should be invested, and more.

What Do the Experts Say About Average Retirement Spending?

Most standard economic models assume that over your lifetime the amount you spend is continuous and relatively stable and doesn’t even drop during retirement. That being said, the rule of thumb used by lot of financial advisors is to plan on spending 20 percent less in retirement than what you spent while working.

However, research suggests that the 20% rule is not necessarily the best benchmark.

Research Suggests that Average Retirement Spending Varies Over an Individual’s Time in Retirement

According to the Employee Benefit Research Institute (EBRI), retirement spending varies over an individual’s lifetime.

Average Retirement Spending Drops Modestly After Retirement

ERBI research suggests that household spending drops at the beginning of retirement. In the first two years of retirement, median household spending drops by 5.5 percent from pre retirement spending levels, and by 12.5 percent by the third or fourth year of retirement. But the spending reduction slows down after the fourth year.

Many Households See Increased Spending

Although average spending in retirement fell, a large percentage of households experienced higher spending following retirement. In the first two years of retirement, 45.9 percent of households spent more than what they had spent just before retirement. This declined to 33.4 percent by the sixth year of retirement.

Spending Can Increase Regardless of Income Levels

Households that spent more in the first two years of retirement were not exclusively high-income households; rather they were distributed similarly across income levels.

Since Spending Varies – Try Planning in Stages

Retirement can be broken into stages. And, each stage has very different spending patterns.

Stage 1: For many people, the first stage of retirement is the transition to retirement. In the transition, you may work part-time or switch to a retirement job. For many people, spending during this stage stays roughly the same as it always has been.

Stage 2: This is the stage where you have officially stopped working and the focus is on leisure. During this stage, your spending might increase as you suddenly have a lot of extra time and your time is spent spending money instead of earning it.

Stage 3: As you get older, your health might decline and you may find that you want to slow down. Spending may really decrease during this phase.

Stage 4: For many people, the last two years of life are the most expensive. Long-term care and medical costs spike for most people at the very end. The fact is that dying is very expensive. Some researchers suggest that if you need long-term care at the end of your life, your healthcare costs might be in the hundreds of thousands of dollars.

A Better Idea: Track Your Spending

To make your money work for you during retirement, you need to track your spending now and make guesses about how your spending habits will change.

A few things to think about regarding retirement spending:

  • Transportation costs might go down as you spend less gas on commuting. However, transportation is usually costlier than even healthcare in retirement.
  • Your housing costs could plummet if you get your mortgage paid off, downsize, or get a reverse mortgage.
  • Will you be paying college tuition for your kids?
  • What are your leisure plans? Are they costly?

“A person’s financial success of retirement depends on two key components – savings accumulated during working years, and spending during retirement years,” EBRI writes. “Quantifying these two components and the underlying behavior patterns is essential to understanding how people are likely to succeed in retirement.”

Create a Retirement Plan that Personalizes Your Own Anticipated Spending

The research is clear – different people have vastly different spending habits in retirement. You cannot create a solid retirement plan by relying on someone else’s assumptions. You need a retirement plan that fits your own spending.

The NewRetirement Calculator enables you to put in different retirement spending for different stages of your life. This can give you a much more accurate retirement plan. The system also automatically factors in medical spending for the end of your life, making this one of the best retirement calculators available online.

Best of all, the system is designed for you to create and maintain your retirement finances. So, as your plans change, you can update your information and get complete analysis about how much money you have and how much you will need to stay financially solvent.

NewRetirement Planner

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