A popular rule of thumb suggests that retirees need 80% of their preretirement income to make ends meet, and some experts encourage saving even more to avoid running out of money. In the face of such daunting goals, 53% of preretirees say they plan on working past age 65 to ensure that they have enough money, according to the Transamerica Center for Retirement Studies.
But the 80% rule isn't for everybody, and it may lead to inflated savings goals that cause undue anxiety as you plan for retirement. Consumer spending decreases significantly as you age. Data from the Bureau of Labor Statistics shows that the average retired household spends 25% less than the average working household.
In order to know how much you need to save for retirement, it's important to know what your spending will look like once you actually retire. Consider these 10 budget line items on which you'll likely spend less in retirement.
For many, saying goodbye to rush-hour traffic and long commutes is a highlight of retirement. The average worker spends about an hour each day commuting -- and time spent traveling to and from work is only increasing each year.
Sitting out rush hour every day won't just help you relax; it will also help you save money on gas and maintenance. Before retirement, the average working household spends $9,758 each year on transportation. That number drops to $6,814 for the average retired household, a 30.2% decrease in household spending, according to the most recent BLS data.
As far as business wear goes, we all know the mantra: You dress for success. Once you've retired, this means you get a break from wearing stiff suits and high heels, and your wallet gets a break from updating your work wardrobe. The average retired household spends $1,070 a year on apparel, while the average working household spends $2,028 a year. Also, factor in the money you'll save on dry cleaning (averaging as much as $1,000 a year in some metropolitan locations).
Caution: Although household spending on apparel decreases overall in retirement, Marguerita Cheng, the chief executive officer at Blue Ocean Global Wealth, says that she sees spikes in spending from recently retired clients who feel the need to update casual wardrobes in the first few years of retirement.
Even if you dream of a retirement filled with steak dinners and brunch dates, chances are you'll still spend less on the food you consume in and out of your house. The average household spends 25% less on food in retirement. According to Erik Hurst and Mark Aguiar, professors from the University of Chicago and Princeton University, the logic to this is simply that you have more time to shop. When you're not in a hurry at the grocery store, you're more likely to compare prices on similar products, use coupons and spend more time planning meals for the week ahead.
Spending on dining out drops even more sharply--as much as 35%. Hurst and Aguiar say that the story behind this is similar. When you're working, much of your dining out may be quick lunch runs or costly lattes on the way to work. Instead of patronizing fast-food restaurants more frequently, retirees reserve their eating-out dollars for table-service restaurants.
There's a common misconception that you'll spend more in retirement on entertainment -- concerts, movies, swing dancing, you name it -- because you have more time. But the numbers don't back this up.
This decline likely corresponds with changes in mobility as you age. Even if you occasionally splurge to see your favorite college band, you may find yourself opting to watch Netflix instead of going out every weekend.
According to the Bureau of Labor Statistics, 61.7% of Americans between the ages of 65 and 74 don't have mortgage debt, and 82.5% of Americans 75 and older are mortgage-free.
To be sure, housing costs don't disappear entirely in retirement. Even if you've paid off the mortgage, you'll still spend on home maintenance, and you'll incur moving costs associated with downsizing, relocating or moving into senior-living facilities. Still, average annual spending on housing for Americans who are 55 to 64 is $18,006. It decreases to $15,838 for those age 65 to 74, and it drops further to $13,375 for those 75 and older.
The average retired household sees a big decrease in personal spending on education, setting aside just about $350 a year for any education, from pre-K through college. That is almost a 79% decrease from the $1,639 of average annual education spending of a working household. Even if you are thinking about going back to school in retirement, many colleges and universities offer classes free of charge to those age 65 and up.
Note: In calculating spending in retirement, the BLS does not factor in money retirees contribute toward college-savings plans for their grandchildren.
The amount you'll spend on insurance (excluding health coverage) drops dramatically once you hit retirement age. The average under-65 household spends approximately $8,100 a year on insurance--including annuities, life insurance and other personal insurance plans, such as homeowners insurance. In retirement, that number drops to $2,840, an almost 65% change in spending.
Most people pay for life insurance while they have a family to support and may opt out once their children are no longer financially dependent. At the same time, retirees may be eligible for discounts on auto and homeowners insurance. Most states offer older adults discounts on car insurance if they complete a defensive driving class, such as one offered by AARP or AAA. And the Insurance Information Institute says that retirees are more likely to receive discounts on homeowners insurance because they are at home more often, reducing the risks of burglary and fire.
Alcohol and Tobacco Products
The New York Times reports that in retirement many Americans find they are less stressed--and therefore smoke and drink less, are less obese, and may be more inclined to exercise. A study by the Journal of Human Resources found that after a few years of retirement, adults are less at risk for serious illnesses, less likely to report loneliness, and may have an increased sense of purpose and camaraderie that lowers their likelihood to binge eat, drink and smoke. (Only 9% of seniors smoke, compared with 15.5% of all adults, according to data from the Centers for Disease Control and Prevention.)
The average working household spends $381 a year on tobacco and tobacco products, while the average retired household spends $198 a year, almost 50% less. Spending on alcohol also decreases in retirement. According to BLS data, the average working family spends $519 a year on alcoholic beverages, while the average retired family spends $370 a year.
Pets and Pet Supplies
It's often reported that having a pet in retirement can benefit your health in big ways. A four-legged friend can provide companionship for lonely retirees and encourage regular exercise. However, the promised perks don't have to translate into massive spending. Working households spend an average of $553 each year on pets and pet supplies, while retired households spend approximately $477 on average.
The Bureau of Labor Statistics says that having children, particularly older children at home, increases household spending on pets -- and can make a family more likely to have a pet.
In an effort to ease the financial burden on retirees, many states waive or lower property taxes for those older than 65 and exempt a portion of retirement income--particularly from pensions, Social Security and retirement-savings plans--from state income taxes.
According to BLS data, households in which the adults are 55 to 64 spend an average of $2,502 each year on property taxes. This number declines to $2,149 for households in which the adults are 65 and older, and to $1,924 in households where adults are 75 and older.