When planning for retirement, you must consider all the costs you’ll be facing. Between healthcare costs, monthly bills, housing, travel and transportation, and other expenses, retirees often face a daunting financial future. But what is the biggest expense for retirees? And what difference does it make? As you’ll learn later down this post, one-third of an average American retiree household’s costs go to a single expense category. Knowing that category will help you plan accordingly while you’re getting ready for retirement. As it turns out, you can minimize those expenses to significantly impact your budget during retirement, but to do so, you need to start acting sooner rather than later.
How Do Our Expenses Change as We Age?
Most of our monthly income goes towards essentials like housing, food, and transportation. These are called “fixed costs” because they’re roughly the same every month and don’t change much from year to year. But as we age, our fixed costs tend to increase, and other variable costs become more important.For example, a typical 25-year-old spends about 27 percent of their monthly income on housing, while a typical 65-year-old spends 33 percent. As we get older, we also tend to spend more on healthcare.
What is the Biggest Expense During Retirement?
Many may think that medical bills and trips to the drugstore end up eating the most significant part of our budget after we retire, but that may only be true for the older population. Most retirees who are 65 to 70 years old are still in relatively good health conditions, and while they require more frequent medical check-ups, their medical bills are not as high as you may think. As a matter of fact, medical bills aren’t even in the second position in terms of an average retiree’s expenses.- Mortgage payments
- Utilities
- Homeowners association fees
- Insurance
- Property taxes
- Maintenance or repairs
- Paying rent
How Much do Retirees Pay in Housing?
Until 2020, retirees aged 65 and above spent an average of $16,880 per year on housing alone, adding a total of $1,406.67 to their monthly expenses. The following year, 2021, saw a slight increase in housing costs for retirees. The national average for all retirees reached $17,454 per year, representing a 3.4 percent increase from one year to the next.The first ten years of retirement are usually linked to higher housing costs. The younger retirees, those aged 65 to 74, spent an average of $18,027 per annum in 2020, while, for the rest of the retirees, those costs were only a little over $15K.
Numbers vary from one retiree to another.
The above numbers are national averages and, as such, do not reflect the actual scenario in every city in every state. Of course, retirees will always spend more or less than the averages we’ve just discussed, based on where they live and the size of their homes.For example, in some cities, like San Francisco, New York City, and Boston, living costs are significantly higher than in other parts of the country. This isn’t just related to real estate costs but also property taxes, which vary wildly from place to place. This is also true for smaller towns in desirable areas where retirees tend to flock to enjoy their golden years, like Sedona, Arizona, and Hilton Head, South Carolina.
How to Lower Your Housing Costs as a Retiree
Understanding how a retiree’s housing costs are structured sheds light on what you can do to manage those expenses better when you retire. It also helps you better prepare for a laid-back set of golden years with more money in your pocket for leisure and entertainment (or, perhaps, investing?). Let’s discuss some of the most impactful ways to lower retirement housing costs.Pay off your mortgage before you retire
Numbers show that retirees today are less averse to taking a mortgage on their home than they were 20 years ago. This partly explains why so many Americans enter retirement still owing large sums of money to a bank, significantly lowering their monthly income.Downsize to a smaller house or apartment
Whether you have finished paying your mortgage or not, you can use whatever equity you have on your home to downsize to a smaller and less expensive house or apartment. This will help you save on maintenance, property taxes, and other related costs. It may even clear enough money to finish paying off your mortgage or make a significant contribution to your nest egg, doubly contributing to more retirement income, which is a top priority when you stop receiving your monthly paycheck.Rent out a part of your house or your entire home
An indirect way to lower housing costs without moving is renting out your extra space. Of course, this is more of an additional source of income to offset housing expenses rather than a way to lower those expenses, but there are ways to make it so that you do reduce your costs and make extra income on the side.You can do this by renting with a triple net lease or NNN, as they’re referred to in the real estate business. A triple net lease is one in which the tenant agrees to pay all the expenses related to the property, including taxes, insurance, and maintenance. In other words, as a retiree renting out your home with a triple net lease, you wouldn’t have to worry about any of those things, as they would be entirely covered by your tenant’s rent payments, effectively taking those costs off your shoulders.
A reverse mortgage could be an option
If you’re 62 or older, own your home outright, and live in it as your primary residence, you could qualify for a reverse mortgage. A reverse mortgage is a loan that allows you to tap into your home’s equity and convert it into cash, which you can then use to supplement your retirement income.Other Expenses to Look Out for During Retirement
Housing may be at the top of the list regarding retirement expenses. However, it amounts to 35 percent of a retiree’s total monthly budget, meaning there’s still 65 percent of costs we can manage to ensure we’ll have enough left over to enjoy ourselves, travel, and even splurge a bit.Transportation costs during retirement
As mentioned earlier, once you retire, you don’t have to worry about the daily commute to work anymore, which can save you a lot of money. But that doesn’t mean transportation costs during retirement will be negligible. In fact, as of 2021, they’re still the second biggest expense in a retiree’s budget, despite the pandemic locking everyone inside for months that caused an 8.5 percent drop in transportation spending in 2020.Healthcare costs are third in line
Trailing closely behind transportation are healthcare costs, which add up to $6,749 per year or $562 per month during retirement. This figure should be taken with a grain of salt, though, since it’s just an average, and it doesn’t reflect the fact that these costs tend to increase as we age and may become quite substantial in our later years.Healthcare costs can be divided into two broad categories: insurance and out-of-pocket expenses. The first category, insurance, includes premiums for Medicare (Parts A, B, and D) and any supplemental insurance policies you may have. The second category, out-of-pocket expenses, refers to the deductibles, co-pays, and other costs you must pay even with insurance.
This is where things can become very expensive, as Medicare doesn’t cover everything, and supplemental policies often come with high deductibles. This is why it’s essential to plan for healthcare costs during retirement and ensure you have enough to cover them.
