6 Ways Spending Changes in Retirement

Most people spend less money in retirement. Here’s what they cut from their budget.

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Most people spend less money in retirement than they did while they were working. Retired households spend a median of $31,365 annually, which is about 80 percent of the $39,945 working households spend, according to a recent Employee Benefit Research Institute (EBRI) analysis of Health and Retirement Study data. Annual expenses also decline steadily with age, falling by 19 percent between ages 65 and 75, and plunging 52 percent by age 95. The majority of study participants (66 percent) experienced a drop in retirement spending, while 16 percent of the households spent more money in retirement.

[See 21 Ways to Reduce Your Retirement Expenses.]

Retirees have lower expenses largely because they are able to eliminate work-related costs like commuting and office attire, and they no longer have to pay FICA taxes or save for retirement. But retirees often spend more on healthcare than people who are still in the workforce, especially if they develop a significant health problem that requires long-term care. Here's a look at the major ways costs change in retirement:

Housing. Housing is the single largest expense for both workers and retirees. Home-related expenses represent 47 percent of all costs for people ages 50 to 64, which declines to 44 percent between ages 65 and 74. "People probably finish paying off their mortgages, so they don't have to pay the mortgage anymore," says Sudipto Banerjee, a research associate at EBRI and author of the report. Downsizing to a less expensive house or condo or moving to a cheaper part of the country can also significantly decrease your housing expenses in retirement.

Healthcare. Health-related expenses are the only major cost that increases steadily and significantly with age. Health costs represent about 9 percent of most people's budget between ages 50 and 64. This number doubles to 18 percent after age 85. "As their health declines, it means more care and the cost of healthcare itself is increasing. The same amount of care costs more now," says Banerjee. "If you have to go into a nursing home or enter into some form of long-term care, that is going to significantly increase your expenses."

[See How to Save for Retirement on a Low Income.]

Transportation. You no longer need to commute to work in retirement. Transportation costs drop from 14 percent of the budget of 50- to 64-year-olds to 8 percent for those 85 and older. Couples who previously needed two cars can often get by with one.

Food and clothing. People tend to spend the same share of their income on food (12 percent) and clothing (3 percent) in retirement as they did while working. But there's certainly room to make cuts if you trade in your suits for jeans and eat more of your meals at home.

Gifts and donations. When grandchildren are born, many retirees spend more on gifts and trips to see them. Some retirees also plan bequests to relatives or charities. "The budget shares spent on donations and gifts go up a lot with age," says Susann Rohwedder, associate director of the RAND Center for the Study of Aging. "As people age, they may start to think they really don't need that money and might start to give it away."

[See 5 Surprise Retirement Costs.]

Entertainment. Retirees enjoy eight or more extra hours of free time each day than they did while working. Some retirees immediately begin traveling or take up expensive new hobbies. "Some people spend a lot of money because they have these pent-up projects around the house to address or they want to do traveling that they never had time to do," says Michael Haubrich, a certified financial planner for Financial Service Group in Racine, Wis.

The budget share spent on entertainment generally remains the same in the early stages of retirement, then tapers off in the later years, EBRI found. People ages 65 to 74 spent 9 percent of their budget on entertainment in 2009, about the same as older workers between the ages of 50 to 64. But these costs decline later in retirement. "If you are not in good health, then you are not able to do those things and that brings your costs down," says Banerjee.