How Much Will You Spend in Retirement?

When people share their retirement plans with me, they often assume that they’ll be able to reduce their spending once they retire. At first glance, this seems reasonable.

After all (they tell themselves) they won’t have to support the kids anymore and the house will be paid for. And the media encourages people to think this way too. They make the argument that once folks retire, they usually spend 80% of what they spend while they are working.

This kind of thinking is wrong and dangerous… Unless you are very mindful and really understand how much money you will need to retire.

My experience tells me that retired people can easily spend as much (or more) than they do when they were working.

Why is that?

For starters, people spend money when they have free time. If you think about it, I’m sure you’ll agree that you spend more money during the weekends than during the week. Why? Because you have the time to do it.

When you’re retired, every day is a Saturday. You can go to movies, have lunch, buy clothes, bowl. Whatever you want. For many, the alternative to spending is sitting at home doing nothing. That’s why they go out and spend.

Their are a few more reasons to explain why we often spend more money during retirement than when we were working.

First, if you got lassoed into paying for your childrens’ expensive college education, you might have refinanced your home. So even though your plan was to pay off your mortgage by the time you retired, the actual situation might be very different. That means you’ll be paying that mortgage for much longer than you had originally anticipated.

Also, times are tough right now. You might be supporting your adult children now. There is a lot of that going around these days.

Finally, there is always inflation. When you are retired, you might spend a disproportionate amount on items that inflate faster than average. Think about what inflation will do to your retirement.

Medical care is one example of this. Another is travel and entertainment. What I’m saying is that the overall inflation number isn’t all that important. What matters to you is the price increases for those things you’ll spend money on once you retire.

So how do you combat this issue before it becomes a huge problem?

1. Track your spending

Tracking your spending and having a budget is more important once you retire than before you retire. I say this because once you retire you can’t just go out and earn more money. In most cases, your income will be fixed and the only thing you’ll have any control over will be your spending. Track your spending and make sure you make adjustments sooner rather than later if problems start coming up.

2. Be a pessimist

When it comes to retirement planning, you should definitely be a pessimist. Plan for the worst and hope for the best. This way, you won’t be eating Purina Cat Chow and looking for a second job when you’re 87 years old. Don’t assume you’ll spend less once you retire. Build your financial plan on current spending and add in inflation.

3. Get Busy

Ever wonder why some smart retirees are busier after they retire than when they worked? It’s because they are smart. They know that they have to fill up their day with activities they enjoy or make money doing (or preferably both). They realize that if they don’t, they’ll have nothing but time on their hands. And they’ll use that time to spend money.

Volunteering is actually very profitable for retirees if for no other reason than it keeps them out of the shopping mall. Start thinking about getting involved in groups you care about now… Before you retire. This way, when you do ring the bell, you’ll have a welcoming support group and fun activities you can enjoy from day one.

4. Make new friends and get rid of some of your old ones

This might be a hard pill to swallow, but you really have to think about who you’re going to spend time with. If you’re on a on a middle-income budget but have friends who are used to going first class, that’s going to be a problem. It will be difficult for you to disengage and you’ll find yourself spending more money than you really want to spend. Start looking at your friends and their spending patterns now. Spend more time with people who have patterns similar to those you can afford.

If you’re in the home stretch for retirement, have you considered these issues? Do you think you’re going to spend less once you stop working? Why?

7 Responses to “How Much Will You Spend in Retirement?”

  1. Anonymous

    We started living on our retirement income a year before we retired and banked the rest. We found out our expenses and excel sheeted them. We found a few part time gigs that pay for the little extras (read plane tickets) we wanted.
    The advantage to all that time off are:
    Neither of us are on high stress meds anymore,
    we both enjoy being outside and walking at 7 instead of dressing for work,
    we can skype the grandbaby anytime of the day,
    we can cruise the internet for bargains,
    we take turn making amazing meals that are healthy (both have dropped ten pounds),
    we both have great volunteer gigs(and people are shocked that we do it for free),
    we live on less than we expected to (which is less than we have lived on for the last 25 years)!

    ajc- your accountant is only parroting what he saw as your weakness. If you see 8-10 hours a day as spending time- seven million won’t be enough in your retirement years- IMHO.

    Funny- our biggest shock was having to put aside $900 a month for taxes and insurance. OW! So much for the house and cars being paid off!

  2. Anonymous

    Maybe we should all be organizing and getting pension benefits for our future selves.

    I feel like there’s no way to estimate, because health costs are such a wild card. So we’re being pessimistic and assuming retirement will be much more expensive than daily life now – except, we also expect to downsize quite a bit as we get older, so the daily stuff is not as expensive. Our biggest “entertainment” expense now is childcare – before we had a baby we mostly did fun free things, and I expect to go back to that when he’s a little older.

    But, man – one bad illness will wipe out a lifetime of savings. One of my aunts has had 4 bouts of cancer and if she wasn’t a union worker with good benefits, she’d have gone straight from the hospital to the street.

  3. Anonymous

    As my accountant told me: when you stop spending 8 to 10 hours a day bringing money in, you will have an extra 8 to 10 hours a day sending (spending?) money out!

    Since I retired (age 49), I have definitely found this to be true!

  4. Anonymous

    I wonder if retirement will become a lost American tradition based on the current economic trend. Pensions, social security and Medicare are going to become dirty words that could actually cause some form of revolt over the next thirty years.

    Think about, I am a young guy under 35 and any new politician is going to have to convince me that it is in my best interest to fork over 40-60% of my income in taxes to support government worker pensions, a broke social security system and a corrupt Medicaid/Medicare plan. At some point the people are going to say enough is enough. Why should I have hundreds of dollars taken out of every paycheck to pay for entitlements for other people? What benefit do I get from this system?

    I think the election on Tuesday sent the first salvo that people are starting to figure out that something has to change. I am not saying the Republicans are great, they have made their fair share of mistakes, but if the system doesn’t change it won’t matter how much you plan and save if the Government continues to devalue the dollar and spend more than it brings in.

  5. Anonymous

    Funny About Money….

    I agree. I paid off my house and was still amazed at what it costs to maintain it.

    BG – LOL……….glad you good at point #2…but hopefully….not that good at it!

  6. Anonymous

    Mainly it will be government workers that will be able to retire — everyone else will work until they die. If you don’t have a pension, and likely one that includes medical benefits — forget about it.

    (I excel at point #2: Be a Pessimist)

  7. Anonymous

    Nice post!

    I find that in retirement (unwilling though it is), I spend less than I did when I had a decent job. However, that’s only because I HAVE to. Spending every minute figuring out how to pinch pennies is not retirement: it’s just a new, very underpaid job.

    Even if you house is paid off, the base cost of running your home doesn’t change. You still have to pay the taxes and insurance, you still have to run the power and gas, you still have to water the plants, you still have to mow the lawn (if you have one), and you still have to repair the appliances and plumbing.

    Nor does the base cost of putting food on the table and living day to day change. You still have to eat. You can’t go around in public naked. You still have to buy gas or pay for public transit to get to the grocery store.

    Meanwhile, medical costs are likely to rise. Medicare costs as much as the most expensive plan my former employer offered; it’s 8 times what I paid for my ex-employer’s EPO. To be fully covered, you have to enroll in not one, not two, not three, but FOUR plans, only one of which is free of charge (except for the FICA you’ll pay on the wages at the part-time job you’ll have to work to pay for all these things).

    If living in retirement costs you less, it’ll be because you’re not living as well.

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