Retirees don't have to pay for professional work clothes, dry cleaning, or transportation to the office. So some workers reason that they will be able to get by with a lower income when they retire. But spending on basic necessities typically increases in retirement. The budget for food, housing, and healthcare is larger for retirees at every income level, according to research by Deanna Sharpe, an associate professor of personal financial planning at the University of Missouri. "What we can't say is that people will spend drastically less," she says. "Estimate that you will be spending anywhere from 100 to 110 percent of your working budget if you are planning to have an active lifestyle. If you are planning to stay home, then maybe 80 to 90 percent." Here's a look at how your spending is likely to change, for better and worse, after you leave the workforce.
Seeing it all. When you're at your desk five or more days a week, you can't always get away to the Caribbean or Hawaii. "My husband and I, when we retire, want to get some traveling in," says Theresa Krueg, a financial adviser and vice president of WealthTrust-Arizona in Scottsdale, Ariz. "We have four kids, but [in retirement] we can pick up and go." World travel and visiting grandchildren are both top priorities for many young and healthy retirees. But expensive trips are one of the biggest contributors to higher spending in retirement.
More dining at home. Retirees spent about 9 percent of their budget on food eaten at home in 2008, according to the most recent Consumer Expenditure Survey from the Bureau of Labor Statistics, compared with 7 percent for working Americans. Yet seniors spend less at restaurants than their working counterparts. That's a good transition to make if you're trying to cut expenses in retirement.
Higher housing costs. Seniors actually spend a greater share of their budget on overall housing costs than working Americans. Although many retirees have finished paying off their mortgage, they still face property taxes and devote a bigger share of their income to home maintenance and repairs than those who are still working. "People forget to budget for what it costs to maintain their home and home improvements," says Roy Williams, CEO of Prestige Wealth Management Group in Pennington, N.J. "You also hire out lawn services or other things that you can't do anymore as you age."
Soaring healthcare costs. Workers who retire before age 65 must pay their own health insurance premiums, unless a former employer picks up the tab. Retirees spent almost three times as much of their income on healthcare as workers. Seniors generally spent more on health insurance, medical services, drugs, and medical supplies. And even after qualifying for Medicare at 65, many seniors still face high out-of-pocket costs "You may have higher deductibles and copays than while you were working," cautions Williams. And you may find new coverage gaps when you leave your group health insurance policy behind. "A lot of times, plans don't cover dental expenses or eyeglasses," he says.
Fewer clothing expenses. When retirees no longer have to dress for success, it's easy for them to slash their clothing budget. "You no longer have to pay for dry cleaning or dress up," says Sharpe. People who have left the workforce spend just 3 percent of their annual budget on clothing, compared with 4 percent for workers.
Lower transportation costs. Giving up your commute saves time, aggravation, and money. Retirees purchased fewer cars and spent less on gasoline and motor oil than workers did in 2008. But seniors also spent slightly more on vehicle maintenance, repairs, and insurance—perhaps because they hold on to their cars longer. Retirees also increasingly rely on public transportation as they age.
Keeping entertained. With eight or more free hours in the day, retirees have plenty of time for hobbies. But retiree spending on entertainment remained the same as that of working Americans in 2008—both amounting to about 6 percent of all spending. Set up plans for volunteer work, list projects that need to be completed around the house, and renew your public library card before you retire to avoid cultivating expensive entertainment tastes.
Giving to grandchildren. When grandchildren appear on the scene, their chubby cheeks and gentle coos are often budget breakers. "Retirees give their grandchildren clothing and gifts at all the major holidays and take more trips to see them," says Williams. Include money for gifts and a plan for bequests in your retirement budget.
Less saving. Workers, of course, spend some of their income saving for retirement. About 13 percent of employee spending went to pension, Social Security, and life or other insurance contributions. For retirees, just 3 percent of spending was devoted to their continued retirement security. Finally, saving for retirement can be crossed off your "to do" list.