Do you know how much you spend on a daily basis? What about weekly? Throughout your life, you may have looked back to assess your spending habits, even if it was just a mental tally. However, estimating your future spending during retirement can be a more complex task.
Have you considered what your average retirement spending will be over the 20 to 30 years of your retired life? It’s a crucial aspect to consider as it determines various retirement planning factors, such as the amount of savings you need and how those savings should be invested.
You might be curious about how your spending projections compare to others. However, it’s important to note that average retirement spending varies significantly across income levels and ages. According to data from the Bureau of Labor Statistics (BLS), households over the age of 65 spend on average:
– Housing: X% of their income
– Healthcare: X% of their income
– Transportation: X% of their income
– Food: X% of their income
– Entertainment: X% of their income
While most economic models assume that your spending remains relatively stable throughout your lifetime, with no significant drop during retirement, the commonly used rule of thumb suggests planning on spending 20% less in retirement than during your working years. However, recent research indicates that the 20% rule may not be the most accurate benchmark.
In reality, spending patterns during retirement vary over time. Research from the Employee Benefit Research Institute (EBRI) suggests that household spending tends to decrease at the beginning of retirement. In the first two years, median household spending drops by 5.5% from pre-retirement levels, and by 12.5% by the third or fourth year. However, the rate of spending reduction slows down after the fourth year.
It’s important to note that while average spending in retirement may decrease, a significant percentage of households experience higher spending in the first few years following retirement. Retirement can be divided into stages, each with its own unique spending patterns:
Stage 1: The transition to retirement. During this stage, many individuals may work part-time or switch to a retirement job. Spending during this stage typically remains similar to pre-retirement levels.
Stage 2: The leisure-focused stage. Once you have officially stopped working, your focus shifts to leisure activities. During this stage, your spending may increase as you have more free time to indulge in activities and experiences.
Stage 3: The stage of declining health. As you age, your health may decline, leading to a decrease in spending. Medical expenses may also decrease during this phase.
Stage 4: The final years. The last two years of life are often the most expensive for many individuals. Long-term care and medical costs tend to spike during this time, making it crucial to consider these expenses in your retirement planning.
To ensure your financial success during retirement, it’s essential to track your current spending habits and make educated guesses about how your spending patterns may change in the future. The Employee Benefit Research Institute emphasizes the importance of quantifying both your accumulated savings during your working years and your spending habits during retirement.
By understanding average retirement spending and how it can fluctuate over time, you can better plan for your future and make informed decisions about your finances. Remember, retirement is a new chapter in your life, and with careful planning, you can enjoy a comfortable and fulfilling retirement.
