Spending As You Head Towards Retirement

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With many baby boomers reaching or in retirement, the question often arises, “Do I need more or less money as I get older?”  It appears that the longer a person lives, aside from health care, all categories of spending decline.

It makes sense that a 92-year-old would not travel as much or do as much yard work as a 45-year-old, therefore, not much money is needed.  In fact, studies have proven this theory.  Over the years, there have been multiple studies of consumer spending.  These studies reveal that the typical American’s overall spending tends to peak around age 50, then slowly declines until the mid-eighties.  All costs, with the exception of medical, decline across the board:  food, auto, housing, clothing, and entertainment all decline as a person ages.

A Natural Decline in Spending

The decline in spending is not due to a lack of funds, but rather to the changes in physical capabilities and a shift in what is important.  For example, a former executive, during his working life would purchase suits and other items needed to dress appropriately for work.  However, once in retirement, a more casual attire would be worn costing less money over the course of a year.  Not many retirees need a suit dry cleaned monthly or buy dress shirts and ties on a regular basis.

The Younger Spending Habits Versus Older Spending

Another example of decreased spending is in jewelry.  Many older women will stop wearing their engagement rings and opt for a simple gold band.  This is not because they no longer like diamonds, but rather they are choosing to focus on other aspects of life.  The reason advertisers focus on the younger generation is obvious.

Net Worth Comparison

When looking at the entire U.S. population as a whole, the net worth of a person can now be compared to the general U.S. population or to their specific age group.  This gives a person saving for retirement a sense of where they are in terms of being on track with their retirement savings.

An informative and eye-opening website to visit to retrieve data on the net worth of Americans is located at https://dqydj.com/net-worth-by-age-calculator-for-the-united-states/.  The website allows for calculations on income distribution by age and a net worth calculator.  Not to be used as a substitute for a financial advisor, this site is merely to gauge the temperature of a person’s financial stance and to decide if changes need to be made in regards to retirement saving.   

Not All Expenses Go Down After Retirement

As a general rule, retirees can expect to need about 70% of their preretirement income to maintain their standard of living after retirement.  This 30% decrease is contributed to expenses related to housing and holding a job.  Most homeowners purchase their home during their 30’s.  With a 30-year mortgage, this means that their housing expenses decrease right around the time they retire.  Commuting costs also decrease after retirement.

However, experts are quick to warn against the thought that all expenses will decrease after retirement.  They cite rising costs related to medical care, housing, and even boredom as areas where spending actually goes up.

Many seniors get sticker shock with their medical costs after retirement.  As we age, we naturally face more medical issues, and without an employer-sponsored insurance plan, out-of- pocket expenses can climb by thousands of dollars yearly.  Fidelity Investments estimates that an average retired couple can expect to spend nearly a quarter of a million dollars on healthcare costs during retirement.

Those who are lucky enough to be mortgage free at retirement are still liable for the property taxes.  Even when housing prices decline, these taxes tend to go up.  In the decade from 2000 to 2010, it is estimated that real estate taxes nearly doubled.

In addition to increased taxes, homes need regular maintenance.  The older a home becomes, the more likely that issues will arise that need repairs.  A new roof, heating or cooling system or new plumbing or wiring are just a few of the expensive repairs retired home owners face.   

Boredom has even been cited as a reason for increased spending during retirement.  For those who are used to working 40+ hours weekly, filling the hours in a day can become expensive.  According to the Bureau of Labor Statistics, an average retired household spends $200 monthly on entertainment.

While many costs drop in retirement, it is important not to overlook these rising expenses.  The importance of saving as much money as possible while working is vitally important.  Some ways to increase savings the last few years before retirement include maxing out a 401(k) or IRA contributions.  This will ensure that those hidden rising costs will be covered leading to a more comfortable retirement.

Active Steps to Take

By taking a few steps the five years before retirement, many people can make a major difference in their quality of life during retirement.  Some examples include:

  • Improve the retirement portfolio by redirecting more money into a retirement savings account
  • Arrive at retirement debt-free by paying off outstanding credit cards, installment loans, car loans, and a mortgage
  • Trim living expenses by eliminating services or products that will not be needed during retirement
  • Reduce the risk in a portfolio by shifting from interest generating assets to income producing equities, such as real estate investment trusts and high dividend yielding stocks
  • Begin work on a post-retirement business or career which will generate income that can protect against a stock market dive
  • Delay retirement by a few years to make major improvements and contribute more money to a retirement plan
  • Work on a healthy lifestyle

No matter whether a person believes that they will need more or less money after retirement, it is important to be prepared for any event.  Taking the proper steps and planning for the future are smart ways to ensure that your retirement will be a comfortable one.

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