Retirement Planning Tips: How Much an Average Person 65 and Older Spends Every Month

Examining the spending patterns of the typical 65-year-old can help you make informed decisions about your own financial future. This data can serve as a baseline for tailoring your retirement plan, taking into account factors such as inflation, your current age, and your desired retirement age. Based on these factors, you can develop a solid financial strategy that aligns with your lifestyle and future goals.

Preparing for retirement is a significant life transition that demands a clear understanding of your financial situation. While everyone’s financial circumstances are unique, having a ballpark figure for expected expenses can serve as a useful guide. A financial advisor can help you understand what the average cost of living for a retiree per year is so you can prepare for your financial future. This article also explores the average monthly spending habits of individuals aged 65 and older and offers practical insights to help structure your retirement plan.

How much does the average retiree spend per month at the age of 65?

According to the Bureau of Labor Statistics (BLS), the average income for individuals aged 65 and older in 2021 stood at $55,335. In contrast, the average annual expenses for this demographic were reported at $52,141, translating to a monthly expenditure of approximately $4,345. Interestingly, the BLS study highlighted a variance in expenses between younger and older retirees. Those in the age range of 65 to 74 incurred higher monthly expenses, averaging $4,870, while individuals aged 75 and older had slightly lower expenses at $3,813.

For a broader perspective on the financial standing of retirees, the Federal Reserve Board conducts the Survey of Consumer Finances every three years. The most recent report, released in September 2020 and based on data collected in 2019, revealed that the median net worth of the typical U.S. household was $121,700. However, this figure more than doubled for individuals aged 65 to 74, reaching a median net worth of $266,400.

Delving further into the financial landscape of those in their late 60s and early 70s, the Federal Reserve Board’s data indicated an average net worth of $1,217,700 for this age bracket. It is important to note that while averages tend to be influenced by high net-worth households, the median net worth provides a more representative figure, standing at $266,400 for Americans in their late 60s and early 70s. These figures can serve as a valuable reference point for individuals planning their retirement.

While the above figures can offer you a realistic view of what the average retirement savings is at age 65, they can also seem intimidating. It is important to note that understanding the average monthly spending for retirees is beneficial, yet it does not precisely predict what your individual retirement will entail. To gain a more personalized perspective, it is crucial to evaluate your current spending habits and lifestyle to determine your unique retirement financial requirements.

Some retirement experts recommend the 80% rule as a practical guideline to estimate your retirement needs. According to this rule, it is advisable to anticipate utilizing 80% of your pre-retirement income to cover expenses during retirement. This percentage accounts for the likelihood that some pre-retirement expenses, such as commuting to the office and socializing, may decrease while others, such as travel and additional healthcare costs, may increase.

Let’s consider a hypothetical scenario where your present household income is $90,000. Applying the 80% rule, you should plan on having at least $72,000 annually during your retirement years. This can ensure a realistic and tailored approach to determining the financial groundwork necessary for a comfortable retirement.

Now that you have a rough estimate of how much it costs to retire comfortably, let us explore some retirement planning tips that can help reach this target:

Tip 1: Get a realistic view of your expenses for a secure retirement

Planning for retirement involves more than just accumulating savings. It requires a comprehensive understanding of your potential expenses. You can develop a tailored retirement plan that aligns with your financial goals and lifestyle choices by gaining a realistic view of your expenses across key categories. According to the BLS, retirees exhibited a diverse range of spending habits, with 48% spending under $2,000 monthly, one in three falling within the $2,000 to $3,999 range, and 18% spending over $3,999 in 2022. Assessing and planning your expenses is crucial to ensure financial security in your golden years. Here’s a breakdown of key expense categories and practical advice to help you navigate them.

The BLS report highlights that housing is likely your most significant retirement expense unless you own your home outright. On average, individuals aged 65 and older spent $18,872 annually on housing, representing a substantial 36.2% of their overall expenses. Consider paying off your mortgage before retirement to manage this major financial commitment. If that is not possible, explore downsizing options or relocating to a more cost-effective area. Calculating potential housing costs accurately is fundamental for developing a realistic retirement budget. The BLS data also revealed that transportation is the second-largest retirement expense, accounting for $7,160 annually or 13.7% of overall expenses. As you plan for retirement, assess your transportation needs realistically. Consider whether owning a car is essential, especially if you live in an area with good public transportation. Downsizing to a single vehicle or exploring alternative modes of transportation could significantly reduce your yearly expenses, providing more financial flexibility in retirement.

Healthcare costs are another substantial component of retirement expenses, averaging $7,030 per year or 13.5% of overall expenses in the BLS report. When planning for retirement, you must prioritize your health by factoring in potential medical expenses. Consider Medicare options, supplemental insurance, and potential out-of-pocket costs for medications and treatments. Maintaining a healthy lifestyle can also contribute to reducing healthcare expenses in the long run. Further, retirees, on average, allocate 25% of their monthly spending toward food expenses. To manage this portion of your budget effectively, plan your meals, explore cost-effective grocery options, and consider cooking at home. Dining out can quickly accumulate expenses, so balancing home-cooked meals with occasional restaurant outings can help you stay within your budget.

Lastly, the BLS report indicates that credit card debt is the most common form of debt among retirees, with 96% reporting having debt in 2022. To secure a stable financial future, you must address outstanding debts before retiring. Create a plan to pay off high-interest debts and consider consulting with a financial advisor for guidance on debt management strategies. Avoiding the burden of debt in retirement ensures that your fixed income can be allocated to essential expenses and enjoyable activities, like travel, socializing, etc.

Tip 2: Contribute to your employer’s retirement savings plan for a secure financial future

Saving for retirement is a crucial aspect of ensuring financial stability in your later years. One powerful strategy to build a robust retirement fund involves actively contributing to your employer’s retirement savings plan, such as a 401(k). 401(k) plans are popular employer-sponsored retirement accounts accessible to employees as part of their benefits package.

One notable perk is the potential for employer-matching contributions that effectively double your savings and accelerate the growth of your retirement fund. The allure of employer matches lies in the fact that they represent free money and provide you with a compelling incentive to participate in a 401(k) plan. 401(k) plans also facilitate consistent savings by allowing regular contributions to be directly deducted from your paycheck. This systematic approach helps build a disciplined savings habit, minimizes the chance of human errors, and guarantees a steady contribution towards your retirement fund. A predetermined percentage of your salary is deducted from your paycheck and contributed to your 401(k) account. This streamlined process eliminates the need for manual contributions, making saving for retirement efficient and hassle-free. Beyond retirement, 401(k) plans can play a crucial role in estate planning, too. In the unfortunate event of your passing, the funds held in a 401(k) can be passed on to your heirs, offering them a tax-advantaged account. While heirs will be subject to income tax on withdrawals, the ability to inherit such an account can still provide significant financial advantages.

However, it is essential to maximize your contributions within the limits set by the Internal Revenue Service (IRS) to make the most of tax-advantaged accounts. You must stay informed about annual contribution limits, as they may change. For instance, in 2024, the contribution limit for 401(k) accounts has increased to $23,000 from $22,500 in 2023. There is also an additional catch-up limit of $7,500 for people over the age of 50. The tax-deferred structure of a 401(k) is a compelling feature. When you contribute, you do so with pre-tax dollars, which helps you lower your taxable income for the year and provides an immediate tax benefit. Lowering your taxable income can potentially move you into a lower tax bracket and result in lower overall tax liability and more disposable income.

These tax-advantaged accounts, including both Roth and Traditional options, offer distinct advantages that can significantly impact your financial well-being. Actively contributing to your employer’s retirement savings plan is a strategic move towards securing a comfortable and financially stable future. Understanding the nuances of Roth and Traditional accounts, leveraging employer matches, and maximizing contributions within IRS limits are pivotal steps in optimizing the benefits of a 401(k).

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Tip 3: Avoid emotional investing to avoid pitfalls

Investors’ sentiments tend to sway with market cycles. This can create a psychological rollercoaster that can lead to counterproductive actions. The importance of avoiding emotional investing to secure a stable financial future cannot be stressed enough. Human emotions have a profound impact on investment behavior. You may react to market highs and lows. When markets soar, investor euphoria tends to set in. This prompts investors to invest in stocks enthusiastically. Conversely, when markets take a downturn, fear and panic can drive hasty decisions, and you may be tempted to withdraw from the stock market. The key lesson here is that emotions can lead you away from rational, long-term investment strategies. Understanding the influence of emotions on financial decisions is a crucial step in avoiding potential pitfalls. Developing a disciplined approach to investing can help you separate emotions from decision-making and focus on a well-thought-out investment strategy.

One of the fundamental principles of retirement planning is to resist the temptation of premature fund withdrawal, especially in response to market fluctuations. Withdrawing retirement savings prematurely can have detrimental consequences and even lead to the loss of your principal capital along with interest. Moreover, early withdrawals may result in the forfeiture of tax benefits and could incur withdrawal penalties, further diminishing your overall returns. Financial literacy is a powerful tool for making informed investment decisions. As you explore investment options, you must prioritize gaining knowledge about the market, risk factors, tax, and potential returns. Remember, financial security and knowledge are interconnected, and an educated investor is better equipped to make sound financial choices. The more you know, the less likely you are to make hasty decisions that can jeopardize your future.

Financial literacy can also help you take proactive steps that can eliminate poor choices. As economic conditions change, your investment mix may need adjustments based on factors such as age, financial goals, and overall circumstances. Diversifying your investments across different asset classes is imperative to mitigate risk and enhance overall returns. A well-diversified portfolio is less sensitive to the impact of a single market event. You must focus on developing an investment plan that aligns with your financial goals, income, age, risk tolerance, and time horizon. Having a clear roadmap can serve as a steady guide during market fluctuations. Adopt a long-term perspective when it comes to your investments. Markets will inevitably experience fluctuations, but a steadfast approach to your long-term goals can help you weather short-term volatility. Seeking advice from a qualified financial advisor can also help by providing valuable insights and an objective perspective. An advisor can help you navigate market uncertainties and tailor an investment strategy to your specific needs.

Tip 4: Create an emergency fund for financial resilience

Building and maintaining an emergency fund serves as a protective barrier against unexpected expenses and shields your retirement savings from unforeseen emergencies. Whether it is a sudden illness, major accident, or the financial upheaval brought on by unexpected circumstances like the COVID-19 pandemic, having a reserve can provide peace of mind and financial stability. A survey conducted by YouGov in April 2021 revealed that nearly 40% of those with emergency funds accessed them during the pandemic. Of these individuals, 73.3% used up half or more of their emergency fund, and 29% depleted it entirely. This highlights the tangible need for a financial cushion during times of crisis. Without an emergency fund, you may resort to dipping into your retirement savings to cover unexpected expenses. This can significantly derail your long-term financial goals and impact the sustainability of your retirement funds. Not having an emergency fund can impede progress toward your retirement goals. In the absence of a financial buffer, the necessity to liquidate retirement savings becomes a real possibility, disrupting your carefully laid retirement plan. To avoid this setback, it is crucial to prioritize the creation of an emergency fund.

Financial institutions and experts often recommend saving at least three to six months’ worth of salary in your emergency fund. This amount acts as a buffer and offers financial support during unexpected unemployment or crises. However, the value of your emergency fund may vary based on your lifestyle, preferences, and income level. You can begin by calculating your monthly living expenses, encompassing mortgage or rent, utility bills, groceries, and vehicle expenses. The goal is to accumulate enough to cover these essential living costs for at least three months, and ideally up to six months. This ensures a robust financial cushion to weather unexpected storms. You can also consider your unique circumstances when determining the appropriate size of your emergency fund. Additionally, if you have insurance coverage or external financial support, it may impact the necessary fund size.

It is important to clearly define the purpose of your emergency fund by listing acceptable expenses. These should be genuine emergencies, such as unemployment, unexpected medical bills, home repairs due to natural disasters, vehicle repairs, or unforeseen tax bills. Although an emergency fund is designed for unforeseen expenses, there may be moments of temptation to use it for non-emergencies, such as vacations or major purchases. To maintain the fund’s integrity, adhere to your list of acceptable expenses and resist diverting funds for non-emergent purposes. If you use the fund, you must focus on replenishing it as soon as possible to be prepared for the next financial emergency.

Tip 5: Review and adjust your retirement plan regularly

Periodically assessing and fine-tuning your retirement strategy ensures that it remains aligned with your current situation and future goals. Imagine you have experienced a significant job change with a new position with a higher salary. Such a change can directly impact your ability to contribute to your retirement savings. If your income has increased, you need to consider adjusting your savings rate to capture the additional earnings and maximize your retirement contributions. Conversely, if faced with a reduction in income, you need to assess how it affects your budget and make necessary adjustments to maintain a consistent savings plan. Job changes not only affect your income but may also come with alterations in employee benefits. Assessing these changes allows you to optimize employer-sponsored retirement plans, such as 401(k)s, and consider additional retirement savings options available in your new work environment.

Similarly, market conditions can also alter your retirement planning strategies. The market is unpredictable, and a periodic review allows you to rebalance your portfolio, ensuring it reflects your risk tolerance and investment objectives. This proactive approach helps you stay resilient in the face of market volatility. If the market is thriving, your investments may experience growth, necessitating a review to ensure your portfolio remains diversified and matches your risk tolerance. Conversely, a reassessment can help you avoid panic-driven decisions and stay focused on long-term goals during market downturns. Personal life changes, such as getting married, having children, or dealing with unexpected health issues, can also significantly impact your financial priorities and goals. Life is dynamic, and your retirement plan should adapt to evolving circumstances. A regular review allows you to consider changes in family dynamics, healthcare needs, or unexpected expenses, ensuring your retirement plan remains realistic and attuned to your evolving lifestyle. If you experience a life event, such as welcoming a new family member, your budget may need adjustments to accommodate additional expenses like childcare or education savings. Adapting your retirement plan to accommodate these changes ensures you are adequately prepared for the evolving demands of life.

You must establish a routine for reviewing your retirement plan. This could be annually, bi-annually, or more frequently based on significant life events. A regular schedule ensures you do not overlook critical updates. It is advised to evaluate changes in your income and expenses, adjust your savings rate based on income fluctuations, and ensure your budget aligns with your current living costs. You may seek guidance from a financial advisor who can help you with this task. Professional advice can provide valuable insights to ensure your retirement plan is in line with your objectives and optimized for your unique circumstances.

To conclude

While estimates and averages can provide valuable guidance, your individual goals must take center stage when aiming for financial security in your golden years. How much money is enough after retirement depends on several factors. Each person’s journey is unique, and it becomes imperative to tailor your strategies to align with your personal aspirations, lifestyle choices, and anticipated needs. The journey towards retirement is not a static path. You have to continuously save, invest, and reflect to ensure you are on the right track. A financial advisor’s input can be instrumental in fine-tuning your retirement strategy and putting you on the path to a secure retirement.

Use the free advisor match service to find a financial advisor who can help you save for retirement and build enough savings for the later years of your life. Answer some simple questions about your financial needs, and our match tool can help connect you with 1 to 3 advisors who can best fulfill your financial requirements.