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Let's get real: What an average retirement costs

NerdWallet logo NerdWallet 6/1/2018 Dayana Yochim
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Video by Money Talks News

The gray-haired couple sipping champagne on a beach at sunset. Grandpa teaching the grandkids how to fish at the family lake house. Are these scenes of carefree times in retirement based on financial reality?

According to the latest Bureau of Labor Statistics data, which is based on 2016 figures, “older households” — defined as those run by someone 65 and older — spend an average of $45,756 per year, or roughly $3,800 a month. That’s about $1,000 less than the monthly average spent by all U.S. households combined.

Naturally, your spending in retirement will vary based on countless variables, including the price of your preferred champagne and the annual property taxes on that lake house (if those things happen to be on your retirement vision board). Read on to learn how retirees’ spending habits tend to differ from the working population, and how you can plan for your personal post-work needs.

Spending by category

Retirees look at their expenses uses a digital tablet. © Tara Moore/Getty Images Retirees look at their expenses uses a digital tablet.

With fewer mouths to feed and no work-related costs to worry about, you may have expected retirement expenses to be even lower than the BLS data indicates.

In some categories, spending does indeed decrease, even in surprising ones like food. In others areas, like health care, life becomes more expensive as you age.

Here’s the data shown as a monthly breakdown of how households headed by a retirement-age person spend money, on average, in seven major categories:

Housing: $1,322

A home in Arizona with a backyard swimming pool © Trevor Smith/Getty Images A home in Arizona with a backyard swimming pool

You may be close to paying off your mortgage, but housing is the biggest spending category for all age groups — retirees included. Some costs never go away, even when a home loan is fully paid. This monthly expenditure includes property taxes, insurance, utilities, repairs and maintenance and household supplies.

Transportation: $567

Fallen Leaves on Parked Car © Arunas Klupsas/Getty Images Fallen Leaves on Parked Car

People older than 65 do catch a break on transportation costs. The $6,814 annual average outlay, which includes the costs of gas, insurance and maintenance and repairs, is about one-third less than the nearly $9,000 average households of other ages shell out each year.

Health care: $499

Doctor giving patient a blood pressure check. © Darrin Klimek/Getty Images Doctor giving patient a blood pressure check.

Insurance premiums — which run over $4,000 a year on average for the 65-plus set — are a spending category that just gets bigger as you age, at least until 75 when BLS data shows costs dipping about $30 per year. While a financial assist from an employer may no longer exist, at least there’s Medicare to help cover some costs.

Food: $483

Groceries sits on a conveyor belt in the checkout line at a Publix Super Markets Inc. grocery store in Knoxville, Tennessee, U.S., on Wednesday, March 5, 2014. © Luke Sharrett/Bloomberg Groceries sits on a conveyor belt in the checkout line at a Publix Super Markets Inc. grocery store in Knoxville, Tennessee, U.S., on Wednesday, March 5, 2014.

This is another major budget category for all ages. Yet retirees spend nearly 20% less than the average household does on food, maybe thanks to more home cooking? Or capitalizing on the classic retiree early-bird special?

Personal insurance and pensions: $237

Social Security card. © FreezeFrameStudio/Getty Images Social Security card.

Those in the household who are still employed (bringing in earned income) are required to pay their fair share of salary to Social Security and perhaps even the company pension, which combined account for the bulk of this average monthly expense.

Cash contributions: $202

Man's hand putting dollars into donation box © Tetra Images/Getty Images Man's hand putting dollars into donation box

Apparently with age comes a greater appreciation of one’s financial blessings. Retirees report dedicating $2,429 of their annual income to “cash contributions” (which include charitable donations), compared with $2,081 by the average household.

Entertainment: $197

PEOPLE IN MOVIE THEATER(c) Ghislain & Marie David de Lossy Getty Images © Ghislain & Marie David de Lossy/Getty Images PEOPLE IN MOVIE THEATER(c) Ghislain & Marie David de Lossy Getty Images

Living it up without having to get up and schlep to the office early the next morning is a perk of retirement. Here older households spend about as much on fun stuff as do those ages 25 to 34, but somewhat less than the broader average ($243 per month).

How this affects retirement planning

average-spent-each-month-during-retirement-story: In some categories, spending in retirement does indeed decrease, even in surprising ones like food. In others areas, like health care, life becomes more expensive as you age. © Unsplash In some categories, spending in retirement does indeed decrease, even in surprising ones like food. In others areas, like health care, life becomes more expensive as you age.

A widely accepted rule-of-thumb is that in retirement you’ll need to replace from 70% to 90% of your income to maintain your standard of living. But again, your mileage may vary depending on when you retire, where you choose to live, how long you live, when you start taking Social Security and a host of other factors.

The bottom line is that what you save today will determine how strictly you’ll have to budget down the road.

Don’t wait for the first sign of gray to see where you stand. Pick the age you want to stop working, type in how much money you’ve saved so far and this retirement calculator will show how much in inflation-adjusted dollars you’ll have available to spend each month in retirement. Adjust the numbers to see how small changes in your savings habits now can have a big impact in the future.

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