Are Your Retirement Expenses Out of Control?

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We’ve all seen the commercials with the gray-haired couple sipping champagne on the beach or the grandfather teaching his grandkids how to fish at the lake house.

But financially speaking, how realistic are these depictions of retirement?

According to the latest Consumer Expenditure Survey, produced every year by the U.S. Bureau of Labor Statistics, “older households” – defined as those run by someone 65 and older – spend an average of $45,550 a year, or roughly $3,795 a month.

Obviously, what you spend in retirement will depend on different variables, including the annual property taxes on that lake house, the price of your preferred champagne, and a number of other individual factors, but you get the point.

If I’m being honest, I think spending $45,550 a year after-tax in retirement seems a bit high. Based on a 20% effective tax rate, $45,550 is equivalent to $54,660 a year in gross income.

To generate $54,660 a year in gross income, you would need an investment portfolio of $1,366,500 generating 4% a year.

Is the average 65+ year-old retiree in America a millionaire?

We know that the average 60-69 year-old American has only about $195,500 saved in their 401(k) and only $62,000 if we look at the median 401(k) account balance, so something seems a bit off…

If we take a more optimistic view, however, we can assume that current retirees over the age of 65 likely have some form of pension income as well as a healthy Social Security check, averaging out at around $1,461 a month. Add to that a little financial help from your adult kids and it should all work out in the end.

But the question I’m most concerned with is where is this $45,550 being spent? With less mouths to feed, no daily commute, it seems surprising to me that retirement expenses are this high.

If we dig into the BLS data a little more, we see a monthly breakdown of how households spend their money, on average. Here are the seven major categories you need to plan for:

Housing: $1,399

Surprisingly, housing is the largest expense for the average retiree. With the median American home price at $226,800, spending $1,399 a month on housing is high.

If your house is paid off by the time you retire, you should only be paying property taxes, insurance, maintenance, and utilities. Therefore, it’s obvious that the average retiree still has a mortgage to pay.

With no mortgage, your average housing expenses would tally up to more like $350 a month based on the median home price today. Point being, paying off your mortgage before you retire is going to save you a LOT of money.

Transportation: $615

$615 a month for transportation is another surprisingly high number, especially given the fact that most seniors get discounts on public transportation.

For example, discounts usually start at 50% of the regular adult fare and go up from there. Some cities, like Chicago, even offer free transportation to all senior citizens.

As a senior, spending $7,380 a year on transportation means you either still have an auto loan you’re paying off or it’s a sign you need to find a more trustworthy mechanic. The average transportation expense across all consumers last year totalled $9,761.

Although seniors are paying less on transportation per year than most, it still seems high in my opinion. Most Americans could do with paying less for transportation. Overpaying for a car is one of the biggest financial killers.

Healthcare: $557

It’s nice to see that health care cost averages only $557 a month or $6,684 a year. The average healthcare cost for a working American is closer to $20,000 a year, which is heavily subsidized by the employer.

The horror stories you hear about health care costs skyrocketing in old age are a bit exaggerated, so long as you have Medicare or some type of subsidized health insurance program.

Food: $539

$539 a month for food is not bad compared to the $600 a month for the average individual. With all the early-bird specials and seniors discount shopping days, retirees should be saving money in this category. My advice, stay away from food delivery apps if you want to maintain a reasonable budget here.

Personal Insurance/ Pensions: $283

It’s a bit unclear why this category even exists. 65+ year-olds should mostly be retired, however, the BLS explains this category as households who are still employed, paying Social Security tax, and contributing to Social Security.

In other words, the secret to a prosperous retirement is to keep your spouse working as long as possible! Seriously, having one spouse work late into retirement means you can typically afford more and live better. It just needs to be a situation you’re both happy with.

Cash Contributions: $210

$210 a month or $2,520 a year in cash contributions (aka charitable donations) accounts for around 4.2% of annual gross spend. 4.2% is a respectable amount since the average American contributes roughly 3% of their gross income to charity each year.

Studies have shown that making charitable contributions can improve happiness. Seeing the effect your contribution has made can be powerful so donate while you’re still alive to enjoy it.

Entertainment: $233

$233 a month for entertainment seems a bit on the low end. But when you consider all the discounts and deals that retirees get for being able to attend movies, plays, and museums during non-peak hours, it makes sense.

Not every retiree is taking an around-the-world cruise or flying to the Mediterranean for a weekend. What most retirees are saying is their newfound freedom provides much of their day-to-day happiness versus having to spend money on expensive experiences.

Overall, the average retiree lives a pretty good life. Being able to spend $45,550 a year after-tax is a decent sum given that the median household gross income last year was $63,179. That means the average retiree got to spend close to 87% of the median household income without having to work. Not a bad deal.

To a richer life,

Nilus Mattive

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