Despite the typical American having less than $100,000 for retirement, the average spending amount in retirement is surprisingly high.
According to the Bureau of Labor Statistics data, “older households” – defined as those run by someone 65 and older – spend an average of $45,756 a year, or roughly $3,800 a month.
I don't know about you, but spending $45,756 after-tax a year in retirement sounds like a lot!
Based on a 20% effective tax rate, $45,757 is equivalent to $57,195 a year in gross income. Based on a 10% effective tax rate, $45,757 is equivalent to a $50,841 a year gross income the average retiree is spending.
To generate $50,841 to $57,195 a year in gross income requires an investment portfolio of $1,271,00 to $1,429,875 generating 4% a year. Could it be that the average 65+- year-old retiree is a millionaire? Based on retirement math, the answer is yes!
Seems Like A Lot Of Money To Spend In Retirement
However, given we know the average 60-69-year-old American retiree has only about $198,000 in their 401(k) and only $63,000 if we look at the median 401(k) account balance, something seems off.
Or, we can take the positive view that everything seems to always turn out OK in the end. After all, if you are a current retiree over the age of 65, you likely have some pension income and are certainly eligible for Social Security, which averages roughly $1,422 a month. However, depending on the age you retire, you could earn a maximum social security benefit of $4,555 a month!
Add on some financial help from respectful kids, and most retirees are doing well financially. Unfortunately, the same might not be true for future retirees.
Average Spending Amount In Retirement By Category
Let's look into the juicy details from the BLS data. There are seven categories in total, which may be an interesting way to categorize our own retirement spending plans.
Here is the average spending amount in retirement by the most important categories.
Average Spending Amount In Retirement On Housing: $1,322
Housing is surprisingly the largest expense by far for the average retiree. With the median home price in America at roughly $225,000, spending $1,322/month on housing seems quite high.
Every personal finance enthusiastic should have their house paid off by the time they retire. After that, all that's left should be maintenance costs, property taxes, insurance, and utilities. Therefore, it's clear that the average retiree still has a mortgage to pay.
If the average retiree had no mortgage, their housing cost would be closer to $300 a month based on the average home price in America. Pay off your mortgage folks! And certainly, reconsider the wisdom of renting for life. Renting long term is like shorting the stock market long term. Not a good idea.
Average Spending Amount In Retirement On Transportation: $567
$567 a month for transportation cost is another surprisingly high figure given seniors get discounts for public transportation.
For example, in San Francisco, depending on income, seniors get a 50% – 100% discount on their monthly MUNI pass, which includes buses and subways. Thus, their total cost, if they rely exclusively on public transportation, is either $0 or $47 for their monthly MUNI pass in one of the most expensive cities in America.
As a senior, spending $6,814 a year for transportation makes it seem like they are constantly getting ripped off at the auto mechanic shop. Yet according to the BLS, the average household of other ages spends $9,000 a year on transportation costs.
These ongoing auto expenses is one of the main reasons why everyone should spend no more than 1/10th of their gross income on a car. Overpaying for a car is truly one of the biggest personal finance killers for the average American.
With senior discounts for public transportation and the invention of ridesharing, transportation costs should come down over time.
Average Spending Amount In Retirement On Health care: $499
I'm pleased to see that health care cost averages “only” $499 a month or $5,988 a year. The average health care cost for a working individual is closer to $20,000 a year and heavily subsidized by the employer.
All this horror talk about health care costs spiraling out of control in old age seems to be exaggerated, so long as you have Medicare or some type of subsidized health insurance program.
Just make sure you consider purchasing a long-term care insurance policy before its needed. The cost of long-term care can completely wipe out the average retiree's savings. Expect health care costs to rise by at least 5% a year, forever.
Average Spending Amount In Retirement On Food: $483
$483 a month for food is reasonable. With so many early-bird specials starting at 5pm, how can a retiree not save money? What a nice life to eat a steak dinner for 60% off, watch some TV when you get home, and go to bed by 8pm.
Let's just make sure the average retiree doesn't get a hold of a food delivery app. If so, their food budget will go out the window.
Average Spending Amount In Retirement On Personal Insurance / Pensions: $237
I don't quite get this category because a 65+-year-old head of household is supposed to not be working. But the BLS explains that this figure is for those in the household who are still employed, pay Social Security tax, and perhaps some contribution to Social Security.
In other words, one of the secrets to retirement is keeping your spouse working! By having a partner work past 65, it's much easier to spend up in your retirement. Just make sure the working partner doesn't resent you for living the good life.
Average Charitable Donations In Retirement: $202
$202 a month or $2,429 a year in charitable donations accounts for roughly 4.2% of annual gross spend. 4.2% is a respectable amount since the average percentage of gross income donated to charity is closer to 3% in America, or $2,081.
It's much better to donate your money while alive than after you're dead. At least if you donate while living, you can see and gain the satisfaction of knowing your money is getting put to good use.
Average Spending Amount In Retirement On Entertainment: $197
$197 a month seems low for entertainment. When you have all the time in the world, it's easy to spend more money. Think about going on a 21-day luxury cruise to the Mediterranean or flying to Hawaii during Polar Vortex season. These activities cost money!
But what I've found in retirement is that it costs less than I thought to be entertained. With so many free parks and activities open while most people are working, there's always something for me to do in San Francisco.
Because you're so much happier being free, you don't require as much expensive entertainment to counteract all the stress you experienced while working.
The Average Retiree Lives A Good Life
My main conclusion from the BLS data is that the average retiree is doing splendidly well. Overall, the average spending amount in retirement seems relatively luxurious.
Being able to spend $45,756 after-tax or $57,195 in gross income each year is a handsome sum of money given the median household gross income is roughly $61,372.
Put differently, the average retiree is able to spend 94% of the median household's gross income without having to work! However, please beware of inflation eating away at the average retiree's buying power. At least the cost of living adjustment for Social Security is keeping up.
Retirees Are Happier Than Average
Given having the freedom to do what you want, when you want is truly the biggest booster of happiness, is it any wonder why our happiness increases with age?
Based on this data, none of us should ever again dread getting old. But I will say, based on first-hand experience of leaving the workforce in 2012 at age 34, it's absolutely worth it to consider accelerating your retirement date.
It's one thing to have money and freedom. It's another level of satisfaction to have money, freedom, and health. Make no mistake, your body will slowly begin to fail you as you get older.
It will take longer for you to recover from an injury or sickness. You'll begin to feel more aches and pains after playing sports. And you'll slowly start to lose your mental sharpness, especially if you aren't consistently exercising your mind through the creative arts.
Making sacrifices for early retirement is worth it. Putting in the effort while you have the energy isn't a big deal.
If possible, shoot to retire between 40 – 50 years old. Such an age range provides the maximum amount of time for wealth accumulation. It also minimizes regret for working not enough or too long.
Recommendation To Grow Your Wealth
Now that you know the average spending amount in retirement, it's time to diligently track your wealth. Sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool. This way, you can see exactly how much you are paying in fees and whether you have the right risk exposure.
After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms.
There's no rewind button in life. Make sure you have a proper handle of your finances!
Build More Passive Retirement Income With Real Estate
A savvy investor build passive income for retirement. I believe the best investment is real estate to take advantage of rising rents and property valuations. However, instead of buying physical rental properties to manage in retirement, invest in private real estate syndication deals.
Take a look at my two favorite real estate investing platforms. Both are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and manages over $3.3 billion in assets for over 500,000 investors. The investment firm specifically focuses on residential and industrial properties in the Sunbelt where valuations are cheaper. For most people, investing in a diversified private real estate fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities have potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
The Average Spending Amount In Retirement is a Financial Samurai original post. Please continue to save and invest aggressively so that you can live your best life post work!