We know the average spending for American households over the age of 65 is a surprisingly high $45,756 a year or $3,800 a month according to the Bureau of Labor Statistics. Now let's look at the average consumer expenditure per year in more detail.
Given the average Social Security benefit is only $17,532 a year, or $1,461 a month, the average retiree likely has a significant amount of retirement savings in order to account for the missing $2,339 a month.
With no debt, life in retirement is quite comfortable for current Americans in traditional retirement age.
But how much is the average expenditure across all ages? Surely, the average American can't be spending too much while working in order to have so much in retirement. Let's take a look at the latest available data from the BLS.
Average Consumer Expenditure
Incredibly, the average expenditure per consumer unit for 2017 was $60,060, a 4.8% increase from 2016 levels. During the same period, the Consumer Price Index (CPI) rose 2.1%, and average pretax incomes decreased slightly by 1.5%.
For 2023, the average consumer expenditure in America is at least 15% higher overall due to rampant inflation.
Eight of the 10 largest components of household spending increased during 2017. The 12.2% rise in education spending was the largest percentage increase among all major components, followed by a 10% rise in entertainment.
Take a look at the BLS data below and we'll go through most of the line items in more detail.
Average Income: $73,573
Although average income declined by 1.5% from 2016-2017, $73,573 is still a pretty healthy amount compared to the median income in America of ~$62,000.
With the median home price in America at roughly $225,000, it's good to see the home price-to-income ratio is still quite reasonable at 3:1. Once you have a roof over your head, life is pretty affordable.
In some cities around the country, however, the median home price is often 10X or greater the median or average income. For example, the San Francisco median income is $97,000 versus $1,500,000 for the median home price = 15X.
Savvy investors should consider adopting my Buy Utility, Rent Luxury (BURL) Strategy to potentially improve their real estate investment returns. There may be some narrowing of valuations over the longer term thanks to technology and migration shifts.
Average Effective Federal Tax Rate: 12.89%
If you punch in the average income of $73,573 into an income tax calculator, you will see that the marginal federal tax rate is 22% and the effective tax rate is 12.89%.
Given the maximum taxable amount for FICA is $132,900 for 2019, the average income earning household pays the full 7.65% FICA amount.
If the average household lives in one of the seven no state income tax states, then their total effective tax rate is 20.54% (Federal + FICA).
On the other hand, if the average American household lives in a high income tax state such as California, they would pay an estimated 25.55% effective tax rate. This equates to $18,800 in taxes on their average $73,573 income.
If you want to exclude FICA from the effective tax rate calculation given it is included in Spending, then the effective tax rate ranges from 12.89% – 17.90%.
Tax is likely your largest ongoing liability, especially if most of your income comes from W2 wages. Instead, think about earning investment income that is often taxed at a lower rate.
Long Term And Short Term Capital Gains Tax Rates
As soon as an individual starts making over $38,701, their long-term capital gains tax rate falls below their marginal Federal income tax rate.
In addition to earning more efficient investment income and rental income, consider earning business income. Business income can be shielded by various business deductions.
Just ask Jeff Bezos how his company, Amazon, was able to earn $11.2 billion in profits in 2018 while paying zero income taxes.
Average Cash Flow: Negative
Given the average expenditure per year is $60,060, the average American household is likely spending all their gross income of $73,573 and then some.
If the average American household lives in a high income tax state, then they have an average negative cash flow of $5,287 a year ($60,060 – $54,773 in after-tax income).
If the average American household lives in a no income tax state, then they have an average negative cash flow of $1,601 ($60,060 – $58,459 after-tax income).
Negative cash flow is likely one reason why average household debt continues to march to record highs.
Good thing debt as a percentage of disposable personal income continues to stay at multi-decade lows. The below graph shows the average American consumer should be able to withstand a negative economic shock better than during the 2008-2009 financial crisis.
Average Food Spending: $7,729
$644 a month on food seems reasonable. What's unreasonable is the growing obesity epidemic in our country that is putting a great strain on our health care system.
According to the Center for Disease Control, about 610,000 people die of heart disease in the United States every year–that's 1 in every 4 deaths. Heart disease is the leading cause of death for both men and women. And obesity is the leading cause of heart disease.
Average Housing Expenditure: $19,884
Seeing a 5.3% YoY jump in average housing expenditure is concerning since inflation averages roughly +2% a year. If you look at the line items under Housing Expenditure, you'll see Owned Dwellings +10.4% YoY and Rented Dwellings +3.3% YoY.
Whichever line item you want to focus on, such large increases in housing expenditures is the main reason why I encourage all of us to get neutral real estate by owning your primary residence.
Over the long run, you will lose out as a renter because inflation is too nasty a beast to conquer. By at least getting neutral real estate, you can ride the inflation wave while paying down your mortgage.
There are multiple benefits to paying down your mortgage early. Not only will your cash flow get a big boost, so will your peace of mind. If you are a parent, paying off your mortgage is one of the top financial moves to reduce stress and anxiety.
Spending $798 a month on transportation for the average American is such an incredible waste of money.
According to Kelley Blue Book, the average car price has surged to $36,000, which likely accounts for why Americans are spending so much on transportation.
Meanwhile, auto loan delinquencies have reached 19-year highs, despite a strong economy. A record 7 million Americans are 90 days or more behind on their auto loan payments, according to the Federal Reserve Bank of New York.
In 2023, the average new car price is close to $50,000. This is an absurd amount of money compared to the per capita income of roughly $45,000. Please don't buy a new car if you want to reach financial independence sooner.
Health Care: $4,928
I'm pleased to see the average American household is only spending $411 a month in health care thanks to employer subsidies. The average health care spend makes the average transportation spend of $798 seem that much more ridiculous.
What's concerning about the average health care spend is the rate of growth. From 2016 – 2017, the spend rate increased by 6.9% after experiencing a 6.2% annual growth rate in the year prior.
At an annual 6%+ growth rate, we should expect the average health care expenditure to double in just 11-12 years.
Spending $267 a month on entertainment for the average household is quite reasonable. With cheap video streaming, low cost internet, affordable mobile phones, and loads of free entertainment online, we are spoiled with multiple low cost options.
The 10% YoY growth in entertainment spending is very high, which probably is a reflection of strong consumer confidence.
Personal Insurance and Pensions: $6,353
The average household is spending 10.6% of their annual spending on Pension and Social Security.
When we add back the $6,353 a month in Pension and Social Security spending (saving) to the $1,601 – $5,287 negative cash flow, the average American is technically saving $1,066 – $4,752 a year, or 1.45% – 6.45% of their average gross income.
As you can see from the chart below, the current personal savings rate according to the U.S. Bureau of Economic Analysis is 6%, which is in-line with the 1.45% – 6.45% range I've just calculated.
Personally, getting a new 20-year term life insurance policy during the pandemic was the best financial move I made. With two young kids and a mortgage, getting life insurance cover until they are adults provided a huge relief.
I highly recommend you get one as well by checking Policygenius.
It never occurred to me the government categorizes Personal Insurance and Pensions as savings, since most do not have pensions and many see FICA as simply a welfare tax.
Therefore, for those who think the same way, there may be a nice upside surprise to our finances when we reach traditional retirement age.
The Average American Is Living A Great Life
If the average consumer can spend $60,060 a year while working and still spend $45,756 a year after the age of 65, it's clear the average American is doing very well.
The easiest expense to reduce is Transportation at $9,576 a year. With the growing popularity of ridesharing and the invention of self-driving cars within the next 5-10 years, I expect transportation cost to start going down as more and more Americans shun owning vehicles.
At the very least, I see the average household reducing the number of vehicles in their driveways.
With $2,010 a year spent in the All Other Expenditures category, the average American household has also allotted a decent buffer for miscellaneous expenses. As we all know, something always comes up.
Spend Less, Save More Than The Average Consumer Expenditure Data
For those of you who are determined to reach financial independence and stay financially independent, the data says we are likely spending too little and saving too much. But it all depends on what age you want to be financially free.
If the average American can save just 1.45% – 6.45% and live the good life, surely the average personal finance enthusiast who is saving 20% – 50%+ of their income while also building a significant passive income portfolio will do just fine.
Social Security is doing a better-than-expected job at keeping the average American afloat. If you are dubious about the government's ability to pay back its people in retirement, it's worth running a new set of retirement calculations. Chances are you're in better financial shape than you realize.
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