How Spending Habits Change in Retirement

Retired people dining

Whether you plan to exit the workforce in a few years or a few decades, understanding retirement spending now can help you better prepare financially for Life 2.0. Knowing how much you might spend could make hitting your savings targets less of a guessing game and increase your confidence about the future. While healthcare spending is likely to increase as you age, it's not the only expense category that will be affected when you exit the 9-5.

Based on 2019 Bureau of Labor Statistics Data, here’s how spending will likely change in six primary categories after age 64:

1. Food 

Food expenses should decline when you enter retirement. The BLS reflects older households spending an average of $6,599 a year. Use your bank records, grocery receipts, and credit card statements to figure how much you've spent over the last year on food. 

Compare your most recent annual food expenses with the average of $6,599 to see how much this expense category might increase or decrease in the coming years. For reference, the average household spends $8,169 on food costs annually.

2. Housing

While various factors influence housing costs, the average annual cost of $17,472 can be a helpful benchmark as you plan for the future. The average household only spends slightly more at $20,679, but your expenses might be significantly more or less due to geographic location, size of home, and other variables.

Do you plan to sell your home and use the equity to buy a home for cash in another state? Are you living in your forever home right now with no plans on selling? Answers to these and other questions about where you plan to spend your retirement can help you estimate housing costs.

3. Utilities

Geographic location and a smaller household size might explain the reduced cost of utilities for persons 65 years and older. Compared to the average spent across households on natural gas, electricity, and other related services ($4,055), the $3,810 annual utility expense associated with more senior households still offers potential savings. 

4. Transportation

One of the most significant expense savings in retirement might be eliminating or reducing daily commuting costs. Plan on saving around $3,000 a year as transportation costs dip to $7,492 on average for seniors, while other households continue to average $10,742 annually.

5. Healthcare

As expected, healthcare costs do increase during retirement. Average spending settles at $6,833, which is over $1,500 higher than the $5,193 average across all households. This difference might be due to the increasing use of medical services and prescription drugs to address age-related health issues. 

6. Entertainment

More free time doesn't necessarily mean more entertainment spending. Older households only spend $2,381 in this category. In contrast, all other households spend an average of $3,090 annually on entertainment expenses. That's an expected 23% savings during your retirement years.

How to Prepare for Retirement Spending

The need for a household budget as you enter retirement is just as crucial to managing your finances as it was pre-retirement. While you might not know precisely how much your fixed and variable expenses will be, you can estimate them based on statistical averages and your retirement goals. 

For example, if you plan on staying in your home once the mortgage is paid off, use the average annual repair and maintenance costs to estimate your housing expenses during retirement. Don't forget to include other costs, such as taxes, insurance, and homeowners association fees. 

Compare your expected income to your estimated expenses to calculate how much additional retirement savings you might need to have financial peace of mind.

Check out our lineup of CDs, Money Market Plus accounts, and IRAs to help secure your financial future and help you grow your nest egg.