Retirement is a milestone that countless workers look forward to. It’s also an expensive prospect that tends to catch seniors off guard. In fact, the U.S. Bureau of Labor Statistics (BLS) reports that the typical senior spends about $46,000 a year in retirement. Since the average retirement length in the country is 18 years, we can project that the typical retiree will need an $828,000 nest egg to pay the bills upon leaving the workforce.
Of course, the challenge in planning for your golden years is that it can be hard to pinpoint exactly what your expenses in retirement will look like. Also, while the average retirement in the country is 18 years, if you retire early, you could be looking at 25 to 30 years or more.
Here, we’ll review some common monthly expenses seniors face to give you a sense of what you might spend in retirement. We’ll also go over some tips for lowering your living costs, such as paying off your mortgage in advance. This way, you’ll be able to make the most of your various income streams, whether it be IRA or 401(k) withdrawals or your monthly Social Security benefits, and ensure that you have enough money coming in to live comfortably.
Many people assume that their expenses will go down in retirement, but in reality, you’ll likely come to find that many wind up staying the same. Think about the various things you spend money on today, like food, electricity, and cable. Just because you’re no longer working doesn’t mean you’ll need to eat less, light your home less, or stop watching TV.
In fact, you may come to find that you end up spending more money, not less, once you stop working. According to the Employee Benefit Research Institute, 33% of households increase their spending during their first six years of retirement, and much of that boils down to the fact that their healthcare expenses climb and eat up much of their income.
This isn’t to say that you’ll wind up spending more money in retirement than you did during your working years. In fact, seniors are generally advised that they’ll need about 70% to 80% of their former earnings to live comfortably. But if you have a host of known health issues or want to travel extensively during retirement, you should plan for a higher level of replacement income — perhaps 100% or even more.
The money to cover your retirement expenses will need to come from somewhere, and the more income sources you secure, the greater your chances of not running into financial trouble later in life. First, there’s Social Security, which pays the average beneficiary today about $1,400 a month. If you were a higher earner, you’ll probably collect more, and if you were a lower earner or took an extensive break from your career, you might wind up with less. As a general rule, however, Social Security will replace about 40% of your previous earnings if you were an average earner. Contrary to what some might believe, it won’t be enough to sustain you in retirement without additional income.
Another key source of retirement income will be your nest egg, which is why it pays to save aggressively during your working years. The amount you wind up with will depend on how much you set aside each year, how you invest your savings, and how your portfolio performs. No matter what your ending balance looks like, most financial experts recommend withdrawing about 4% of your 401(k) or IRA each year in retirement to ensure that you don’t deplete it prematurely. This means that if you retire with $1 million, you’ll have about $40,000 of income from savings to work with (though depending on the type of retirement plan you have, you might lose some of that to taxes).
If you work for an employer who offers a pension, that’s another key source of retirement income to look forward to. With a pension, your employer essentially agrees to pay you a certain amount of money each month in retirement, usually calculated as a percentage of your ending salary coupled with the number of years you worked for the company in question. Unfortunately, pensions are no longer as popular as they once were, so if you don’t have access to one, you’re in good company. It also means that you’ll need to step up your savings game to ensure that you have access to the money you need in retirement.
Finally, you might snag yourself some extra money in retirement by working part-time, monetizing a hobby, starting a business, or renting out your home in some capacity. These are all options to consider if you’re worried that you won’t have enough income to cover the bills from your primary sources, like your nest egg and Social Security benefits.