Understanding Average Retirement Spending

Predicting what you’ll spend in retirement is a key step in retirement planning, but it can be challenging. According to the Bureau of Labor Statistics (BLS), American households led by people aged 65 and older spend an average of $4,345 per month. This figure includes housing, food, utilities, household operations, clothing, transportation, health care, entertainment, and miscellaneous expenses.

Interestingly, households led by older retirees tend to spend less than their younger counterparts. For instance, households headed by 65- to 74-year-olds spend about $4,870 monthly, while those headed by people 75 and older spend around $3,813 monthly.

Your Spending Will Differ

While BLS data provides a useful benchmark, your own spending will almost certainly be different. Factors such as the cost of living in your area, whether your home is paid off, your travel plans, and health care costs will all influence your retirement expenses. Using your current budget to project expenses in retirement is a more accurate way to estimate your personal spending.

How Much Should You Have Saved for Retirement?

Ideally, your retirement savings should cover your expenses from retirement to the end of your life. However, several unknowns can complicate this calculation:

• Unexpected expenses: Beyond regular expenses, you may face unexpected costs such as dental implants or home repairs due to natural disasters.
• Lifespan: Most of us don’t know how long we’ll live in retirement.
• Interest and investment earnings: While you’ll presumably earn interest and/or investment gains during retirement, this income can fluctuate.

Retirement planners often use the “4% Rule” to estimate how much savings you’ll need. This rule suggests you can safely withdraw 4% of your retirement savings during the first year of retirement and continue withdrawing that amount (adjusted for inflation) for 30 years without running out of money. For example, to cover average spending of $52,141 per year, you would need $1,303,525 in retirement savings.

Should You Count on Social Security in Retirement?

The average monthly Social Security check for retired workers in April 2023 was roughly $1,786. However, your monthly benefit amount may differ. You can estimate your monthly benefit at different retirement ages by visiting the Social Security website and signing up for an account.

While a $1,786 check every month doesn’t cover the average spending of $4,345, it does cover more than 40% of the way there. Using average data, your retirement savings would need to cover an additional $2,559 monthly, or $30,709 per year. Following the 4% rule, you would need roughly $767,725 in retirement savings to sustain a $30,709 annual withdrawal for 30 years, adjusting for inflation every year.

Tips for Cutting Expenses in Retirement

On average, retirees spend the most on housing, transportation, and health care each month. Here are some tips to help you cut expenses in these areas:

1. Cut Your Housing Expenses

Housing is the largest retirement expense, averaging $1,573 per month. Whether you currently rent or own, look for ways to reduce your housing costs, such as paying off your mortgage early, downsizing, taking in roommates, or moving in with friends or family.

2. Sell Your Car—or Your Second Car

Maintaining a car involves car payments, insurance, fuel, repairs, maintenance, parking, and more. If you can do without your car (or second car), now may be a good time to sell. You may also benefit from moving to a place where walking and public transportation make a car unnecessary.

3. Plan for Health Care Expenses

An average retired couple aged 65 in 2022 may need roughly $315,000 in after-tax savings to cover health care expenses in retirement, according to the Fidelity Retiree Health Care Cost Estimate. If you aren’t retired yet, consider using a tax-advantaged health savings account to build up reserves. You can get free counseling from your state’s State Health Insurance Assistance Program (SHIP) to ensure you’re choosing the Medicare plan that makes the most financial sense.

The Bottom Line

While average retirement spending data can help you ballpark your retirement finances, it’s not a substitute for detailed calculations. Start by taking stock of your expected costs based on your current budget. Look for ways to cut your expenses and find out how much you’re likely to get in Social Security.

If you need help, consider meeting with a financial planner who specializes in retirement planning. They can help you work out a retirement spending plan that fits your budget and your vision of a comfortable retirement.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand the importance of financial planning for retirement. Whether you’re looking to refinance your home, pay off your mortgage early, or explore other mortgage options, we’re here to help. Call us today at 213-732-3074 for expert mortgage services tailored to your needs.