How prepared are you for retirement? If you assume that your monthly expenses will decrease in your post-working life, then you might be surprised to learn that many retirees experience the exact opposite. Instead, their expenses go up.
How can that be? If you pay off your mortgage before retiring then perhaps your monthly budget will be noticeably lower. But, it’s not reasonable to expect your current lifestyle will drastically change in a more frugal direction upon retirement.
There are many ways we psychologically approach retirement, but “live as frugally as possible” is likely not part of the plan. Instead, retirees view it as a time to live in well-deserved luxury and relaxation, whether that involves going out to dinner more frequently, traveling the world aboard a cruise, or spending more money on our hobbies.
Unfortunately, we don’t switch to that mindset until we actually retire. Until then, we assume we’ll be as frugal as we currently are and plan for a relatively similar lifestyle in our retirement budgeting processes. If you spend $200 per month on your hobbies right now, then chances are, you’ll spend more on your hobbies later on when you have much more free time to partake in them.
If you want to make retirement planning less stressful, then here are some expense categories to watch out for if you truly believe your spending won’t change much during retirement.
Why Your Spending In Retirement May Actually Increase
Health Care Expenses
Even with Medicare coverage, did you know that the average couple spends more than $260,000 on health care from age 65 onward? While one-third of this figure represents Medicare premiums, the rest accounts for co-pays, dental costs, vision costs, prescriptions, and other health care expenses that may not be covered by Medicare.
According to newer statistics, a couple retiring in 2018 would need to have $275,000 available to cover their health care expenses during retirement. As the inflation rate for health care in the U.S. continues to rise much more quickly than other areas of life, you and your spouse can reasonably expect to pay more than $300,000 for health care during your retirement years if you’re still a few years away from retiring.
Although the costs of health care for seniors are outrageously expensive, too few people are saving enough for retirement, let alone enough for their medical bills and possibly nursing home care. Even if you think your current health-related expenses are unbearable for your budget, be sure to overestimate how much they’ll cost when you’re retired.
The best way to plan for this is by contributing money as early, and as much as possible towards your 401k, IRA and other investment accounts to cover your expenses in the future.
Traveling the World
According to AARP’s 2017 travel trends report, the average retiree takes about five leisure trips per year during retirement, with 43% of Baby Boomers reportedly wanting to travel both domestically and internationally. Furthermore, many Baby Boomers want to travel more during retirement, but the AARP’s report found that 43% are held back by costs.
“There are many different reasons that your spending may increase in retirement and is very common in the early years of retiring,” said Justin Halverson RICP, a financial advisor and founding partner of Great Waters Financial based in Minnesota. “Now that you have more time you may be pursuing those dreams of traveling or fixing up the house and checking off similar items on your list.”
If you enjoy traveling, then you’ll probably take more vacations during retirement because you finally don’t have to check if you have enough vacation days saved up or ask a boss for permission to take time off. In other words, you have unprecedented freedom to travel as a retiree. The freedom that you might not have had since you were in college, if ever in your life.
While you should certainly see as much of the world as you can or want to during your post-working years, keep in mind that your current travel budget will likely pale in comparison to your actual travel spending during retirement. As with health care, it’s important to overestimate your projected travel budget and seek out ways to save money on vacations once you’re retired.
Dining Out More Frequently
Another budget category to be wary of as you approach retirement is the food/drink category. You might think you’ll eat at home more often once you have more time to spend grocery shopping, cooking and cleaning up. However, if you’re already in a pattern if dining out on a regular basis, then why would you suddenly change your lifestyle during retirement?
If anything, people tend to eat out more when they’re retired, simply because they can afford to. Go ahead and enjoy all the delicious things life has to offer while you’re retired, but be sure to look for opportunities to save money. Go to dinner during Happy Hour specials. Or, go out for lunch instead of dinner.
Useful Strategies for Controlling Your Budget
If you’re worried about running out of money during your retirement years, then there are a few ways you can either decrease your spending or increase your income to avoid reaching $0.
- Develop passive income streams to make money without extra effort
- Continue contributing to your retirement plans, even after you’re retired
- Keep your life insurance policy even after you retire and have few or no dependents
- Look for opportunities to make money with resources you already have. Becoming an Airbnb host can be lucrative for retirees and help you save money on accommodations while you’re traveling
- Cut down on your grocery budget while cooking at home more to save money on dining expenses
- Look for other ways to save money on monthly expenses around your home