Top Spending Categories in Retirement
As we all know, just because a person retires, that does not mean his/her expenses just disappear. Rather, one specific challenge retirees face is the ability to live off their limited income and savings while also covering living expenses. And of course, they want to do this with many different types of goals: one of which is to not run out of money, as most retirees do not want to burden their family or end up in a state nursing home.
As we begin to review the top spending categories in retirement, we find they are in fact similar to those we engage in while still working. There are a couple of exceptions to this that vary from family to family, depending on unique circumstances. Let’s say, for example, you’re five years away from retirement and have a mortgage, two car loans, and maybe even some leftover student loans. You've planned it all out: how you’ll pay off your car loans, student loans, mortgage, and any other types of personal debt to avoid post-retirement repayments. This is sometimes a situation wherein living expenses dramatically differ from those incurred during a person’s working years.
A person’s wealth doesn’t even matter much in this case. For example, let's consider a married couple who have multiple homes with multiple mortgages: a mountain home, a lake home, and a primary residence in the city where their children went to school or their children/grandchildren are located. Maybe they also have a beach home, and it is during the latter years of their careers that they accumulated all of these properties. Age isn’t a consideration here, as some people are fortunate enough to retire earlier than others. So for these high-income earners with a high net worth, their varied homes are strapped with a bunch of mortgages they’re looking to offload pre-retirement. In doing so, they hope to only deal with their current mortgage payment or perhaps sell off their non-primary homes. If they go the latter route, they can use the equity to pay off the mortgage for their primary residence—leaving them with no mortgage payment versus multiple payments required previously. Hence, this is a situation in which someone greatly reduces living expenses upon retirement. I've seen it happen before!
This topic, of spending in retirement, is typically something a wealth manager would cover and an asset manager would not.
For example, we had a client who owned two lake condos, one mountain home, and a primary residence: each one worth between $500,000 to $1.2 million, which would in fact be even higher today given the soaring real estate market and decline in income rates over the past 18 months.
Now, let’s dive into and rank various spending categories and discuss what each one may look like, specifically, during retirement.
When you think of the top spending categories, you just know housing rings in as a primary concern. As noted above, while someone might not have a mortgage to pay off, he or she may still have to account for property tax maintenance and utilities. For some people, however, housing may not even rank as a top category. If they have a well-built home with quality appliances and a robust AC unit, for example, and have properly maintained their entire property over a series of years, then it's conceivable that despite repairs, maintenance, utilities, and taxes, housing ranks lower than other categories. Nevertheless, this typically occupies the top of the list.
The No. 2 expenditure that we typically see is food, which has increased in price at a rate of about 2.3% over the last hundred years or so. In fact, prices have risen about 2.2% over the last 21 years alone. Yet, this is clearly a necessary expenditure—one reason it's ranked among the top three. You don't need a mortgage. You don't need a car loan. But food? You certainly need that! Akin to how you pay for a roof over your head (whether you buy or rent), 100% of retirees spend money on food costs. Other expenditures are much less essential, and we'll get to those as we move down the list.
Healthcare is another huge cost. For people about to retire, this can range anywhere from $12,000 to $30,000 annually and includes Medicare premiums, supplemental coverage, and out-of-pocket costs. Adding it all together, you’re looking at an average of $600-plus a month, which opens up a whole other discussion about protecting your health during the retirement years.
For me personally, one of my biggest goals is to always fit in some sort of daily exercise—even just walking—and maintain a healthy diet. Specifically, I try to incorporate a lot of raw fruits and vegetables into my diet and drink plenty of water. One of my most vivid memories from when I first got into this industry is related to time I spent selling life insurance in the early 2000s. As a broker, the top three questions I would ask to help generate quotes focused on an applicant’s height, weight and whether or not the person smoked: serving as a general litmus test for health and life insurance. Admittedly, I don't know if these are still the top three questions, but it certainly was when I sold these products from 2003 to 2008 (alongside my investment management services).
As we consider, say, the ill effects of poor health, they really can drive up the cost of health insurance during retirement. The reason these companies ask for height and weight is to determine an applicant’s body mass index (BMI), which suggests a tremendous amount about that person's overall health. Of course, when you apply for health or life insurance, the company will ask you many more questions beyond just the three mentioned, but as I remember it, they served to kick things off as primary areas of consideration.
In considering transportation, this depends (once again) on an individual’s unique situation. As they're getting ready to retire, some people pay off hefty car loans and buy a reliable car that is nice and affordable. Car insurance and gas are of course still a must, and you must budget for expenses related to vehicle repairs and maintenance. Considering an active couple who both own cars, for example, even if they're paid for, transportation will no doubt rank in the top five. Depending on the type of car, this can cost $20,000 or more and include loans, etc. For any city dwellers or other non-drivers out there, public transportation costs must be accounted for as you look to get from place to place on a daily basis.
5. Home Improvements
Considering other expenses that impact our clients, I would say No. 5 is home maintenance or improvement costs. Oftentimes, they want to upgrade their kitchen. They want to upgrade their bathroom. They want to repair the roof or invest in landscaping. No matter the project at hand, all these costs add up year after year after year. I would say that for almost all of our financial planning clients, their retirement budget goals include different types of home improvements and maintenance—which can get quite expensive. Most recently, we laid out a budget in the range of $50,000.00-$60,000.00 for a kitchen remodel, and expenses like that add up over time but also vary. One year you may spend $50,000 or $100,000 (or even just $10,000), and then the next year you may spend nothing. Home repairs are probably unavoidable, but most improvements occur based on choice rather than need. Averaged out over time, we see these expenditures on a frequent basis.
With respect to travel, this of course depends on what type of travel clients want to engage in. Of course given the ongoing pandemic during 2020-2021, all travel budgets have declined—most notably with respect to the international variety. Nevertheless, these budgets are costly (especially if you want to go abroad, which is very expensive). So while the inability to travel and spend money on the road (or in the air) has certainly had a positive impact on retirement budgets, this probably won’t last much longer with travel picking up again. [KM6] Whether wandering near or far, most people can easily breeze through $10,000 in travel expenses. Again, this varies from person to person and couple to couple, depending on their lifestyle and retirement goals.
Set Up a No-Obligation Call
Thanks for reading about some of the top spending categories we see here week in week out while poring over and creating financial plans for our clients. If you would like to see how much you can afford across these different categories with respect to your retirement, set up a no-cost, no-obligation retirement success call by clicking on this link. We can review where you are now, which spending categories apply to you, and where you want to be, and ultimately decide to schedule a follow-up meeting at the end of the call if appropriate.