Navigating Retirement: Challenges, Considerations, and Personalized Planning
If you’re nearing retirement, chances are you may already be contemplating a shift in your lifestyle. As it could soon be just you (and perhaps your partner) at home, the idea of downsizing might merit serious consideration as well. Especially for those primarily reliant on their Social Security check, which averaged an estimated $1,907 per month as of January 2024, financial planning becomes crucial. This figure, however, may fall short of covering monthly expenses. According to 2022 data, the average American spends $779 on food, approximately $469 on utilities, and up to $1,000 on healthcare, totaling around $2,248. Housing costs, averaging around $1,900, have not yet been accounted for, indicating the extent to which the average check may fall short of covering expenses. While it is true that the Social Security check isn’t meant to help retirees cover all of their expenses, many aren’t left with a choice considering they have minimal to no retirement savings at all. Additionally, while the average Social Security check technically keeps recipients above the federal poverty line, it often fails to meet the standard of living most Americans desire. Moreover, seniors in poverty often receive significantly lower Social Security payments than the average.
According to the Bureau of Labor Statistics, the average retiree lives on a monthly average of $4,345. Many big and small expenses are to be covered within this dollar figure. But what factors contribute to this limited spending once retirees enter their golden years? The Goldman Sachs Group, Inc. (NYSE:GS) identifies a phenomenon known as the "financial vortex," which impedes potential retirees from saving adequately for retirement. The Goldman Sachs Group, Inc. (NYSE:GS)' report reveals a concerning trend: retirement savings for US employees have dwindled by as much as 37%. Despite an overall increase in savings among US workers over the years, the burden of financial responsibilities within this vortex has led to retirement delays for 21% of respondents, sometimes extending their retirement years by up to four years.
"While retirement sentiment improved over last year, the financial vortex remains a huge problem for many workers and retirees. Its challenges are largely immune to improvement in markets and the economy and will continue to impact new generations of retirement savers”.
Financial vortex aside, many US workers do not know how much to save for retirement anyway. Needless to say, financial experts can’t decide on a single dollar figure either.
"Because there are so many variables, even the retirement researchers can't agree on a total dollar amount”.
What Storey means is that since there are so many variables involved, it becomes hard for the number crunchers to agree on a single amount. Everything from a person's age to the age they wish to retire at, and factors like health and job loss, can make a huge impact on how much you should be saving over the years.
This is what Debra from Bank of America Corporation (NYSE:BAC) has to say about why a single dollar figure can't cover everyone:
“Tempting as it is to put a single number on retirement, the answer to how much you'll need to save really depends on the life you expect to lead. For some people, $1 million in savings may be plenty; others might need more — or less."
For those who are yet to reach retirement, careful retirement planning can help them live comfortably in their golden years. One part of retirement planning involves considering which parts of expenses will take up the most of your budget, and how best to keep them in control.
With that said, let’s check out the biggest expenses for retirees and how to minimize them.
12 Biggest Expenses for Retirees and How to Minimize Them
A close-up of a hand holding an individual retirement account statement.
Methodology
Our methodology for ranking the 12 biggest expenses of retirees entails a comprehensive approach, considering the percentage of the total budget allocated to each expense, its classification as essential or non-essential, frequency of occurrence, and impact on retirees' quality of life. To account for a percentage of the total budget allocated to each expense, we have taken BLSdata from 2022. This approach helps us understand retirees' financial needs better and prioritize expenses accordingly, making it easier to plan for retirement expenses. Expense categories have been ranked in ascending order from the lowest to the highest Insider Monkey scores.
By the way, Insider Monkey is an investing website that tracks the movements of corporate insiders and hedge funds. By using a similar consensus approach, we identify the best stock picks of more than 900 hedge funds investing in US stocks. The top 10 consensus stock picks of hedge funds outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). Whether you are a beginner investor or a professional one looking for the best stocks to buy, you can benefit from the wisdom of hedge funds and corporate insiders.
Here are the biggest expenses for retirees and how to minimize them:
12. Recreation and Leisure
Insider Monkey Score: 5
Recreation and leisure may appear relatively inexpensive, but for retirees with ample free time, these pursuits can unexpectedly become one of the biggest expenses for retirees. Retirement is also the time seniors keep for taking up hobbies and activities that they have wanted to do their entire lives. However, hobbies and activities can cost supplies, equipment, and even all kinds of fees. According to the Bureau of Labor Statistics (BLS); pets, toys, hobbies, and playground equipment cost seniors aged 65 and above an estimated $712 annually. In order to minimize these expenses, retirees can look for free or low-cost activities such as community events and utilize senior discounts available. Group memberships and public resources like libraries offer additional opportunities for affordable entertainment, while strategic planning and DIY leisure pursuits can help stretch the budget further.
11. Miscellaneous
Insider Monkey Score: 6
Next up on our list of biggest expenses for retirees and how to minimize them is miscellaneous expenses. Miscellaneous expenses often go underestimated in retirement planning but can accumulate to become the largest retirement expense. For this reason, it is important to keep them in check. Anything from funeral expenses, legal and accounting fees, various household services, babysitting and adult care, toys, lotteries, and even pet expenses fall into this category. BLS notes that miscellaneous expenses take up $943 annually for people aged 65 and above. One way to reduce retirement costs is to establish an emergency fund to cover these unexpected costs.
10. Travel & Entertainment
Insider Monkey Score: 9
Dreaming of exotic travel and road trips in retirement are common, and we have got extensive lists of the best vacations for retired couples, the best vacations for seniors on a budget, and vacations for seniors with limited mobility that provide lots of options to choose from. Nevertheless, it's vital to acknowledge the significant costs associated with these adventures. Entertainment expenses can cost $2,672 annually, one of the biggest expenses in retirement. While budgeting is essential, there are other strategies to make travel and entertainment more affordable, such as leveraging senior discounts, opting for off-peak seasons, or discovering budget-friendly local destinations.
9. Home and Asset Management
Insider Monkey Score: 10
It takes older adults an average of $3,266 annually on maintenance, repairs, insurance, and other expenses, accounting for 5.6% of their total annual expenditure. These costs can quickly accumulate and become significant burdens on retirees' budgets. From routine upkeep like lawn care and appliance repairs to unexpected maintenance like plumbing emergencies, the costs of sustaining a home can be substantial. To manage these costs effectively, retirees should consider budgeting, preventive maintenance measures, and explore insurance options to alleviate financial strain and ensure long-term stability.
8. Personal taxes
Insider Monkey Score: 14
The average monthly retirement expenses also include taxes. Taxes in retirement can vary greatly depending on aspects such as your retirement income and where you live. Income taxes, including those on pensions, retirement account withdrawals, and Social Security benefits, can erode retirement savings. Based on data from the Bureau of Labor Statistics (BLS), personal taxes, including federal income taxes and state and local income taxes, account for nearly 6% of a retiree's average annual expenditure. This is why it’s best to opt for states that don’t tax retirement income. Those who are completely reliant on Social Security benefits can check out all the states that won’t tax your Social Security income in 2024.
7. Personal Insurance and Pensions
Insider Monkey Score: 14
According to the Bureau of Labor Statistics, personal insurance and pensions spending saw a notable 11.0% increase in 2022, following an 8.7% rise in 2021. This surge was primarily fueled by a rise in contributions to pensions and Social Security. Notably, within these contributions, expenditures on non-payroll deposits to retirement plans surged by 28.8%. Alongside, expenditures on life and other personal insurance also saw a significant uptick, rising by 9.7%. As of 2022, this expense category amounted to an annual $ 3,289 for seniors aged 65 and above. In order to maximize retirement income for later, seniors can delay taking their Social Security benefits and even consult with a financial advisor to evaluate options and develop a personalized strategy that can mitigate expenses while ensuring adequate coverage for their needs.
6. Cash Contributions
Insider Monkey Score: 14
According to BLS, cash contributions are a "catch-all that includes financial support for college students living away from home, alimony and child support payments, and personal cash gifts, such as those for birthdays or weddings. Also included are cash donations to religious, educational, charitable, and political organizations, as well as gifts of stocks, bonds, and mutual funds made to persons or organizations outside the household”. As of 2022, cash contributions accounted for 7.6% of total expenditure for seniors aged 65 and above. Retirees can minimize cash contributions through budgeting, cutting discretionary spending, downsizing housing, and even exploring senior discounts. Additionally, supplementing income through part-time work or freelancing, and managing investments wisely can help reduce reliance on cash contributions from savings or investments.