Retirement's Here: My Exciting Retirement Plans with My Social Security Checks
If you're like most people, your primary motivation for saving and investing during your working years is to ensure a cozy retirement. That's my top reason, but I've gone an extra mile. While retirement is still a distant dream for me, and I understand that many factors may change in the meantime, I've even started considering a retirement spending budget. I'm also one of those optimists who's factoring Social Security payments into my retirement income plan (albeit at the reduced rate that might need to increase about a decade from now).
My strategy isn't necessarily the right fit for everyone: You might end up spending less in retirement, or you might require more. It's also possible I'm completely off base about how much income Social Security will provide when the time comes. Nevertheless, if my budget reflects the nationwide average, it could at least serve as a starting point for you to craft a similar rough plan.
An Average Retiree's Spending
Take these numbers from the Bureau of Labor Statistics' 2023 survey of consumer spending with a grain of salt. They're averages, but remember that the underlying data can vary widely. Essentially, don't be surprised if your financial reality ends up being significantly different than the overall average.
Nevertheless, the survey's examination of the expenditures being made by U.S. residents aged 65 and up should give you a decent idea of what you'll likely face when the time comes. Listed in descending order...
Housing
According to the U.S. Bureau of Labor Statistics (BLS), the average retiree household spends approximately $21,445 per year, or $1,787 per month, on housing costs – not just mortgage payments or rent, but also taxes, insurance, and maintenance.
This figure requires a couple of critical caveats. First, it doesn't distinguish between retiree households with one person or two; presumably, a two-person household would cost less to live in. Second, many retirees may own their homes, and so don't have a mortgage payment or rent. Therefore, this figure shows the most variability in a specific retiree's living costs.
Transportation
Surprisingly, retirees' second-largest expense isn't healthcare, but transportation. The BLS reports that older Americans still spend $9,033 per year, or about $753 per month, on transportation. This largely stems from car payments, but it can also include gas, insurance, and maintenance. Anyone using public transportation will probably spend less, while two-car retiree households will likely spend at least a little more.
Healthcare
Don't let the misconception that retirement means an escape from healthcare costs fool you. Even with access to Medicare coverage, healthcare costs stay relevant in retirement. Typically, the over-65 crowd spends just over $8,027 per year, or $669 per month, on expenses Medicare doesn't cover. Even if you have supplemental insurance – another cost – you'll still incur at least some health-related expenses in retirement.
Food
You won't need to spend quite as much on food in retirement as you did during your working years – maybe because you'll be eating more meals at home, or perhaps because there won't be constantly hungry children in the house. Whatever the reason, expect to allocate about $7,714 annually, or $643 per month, for food in retirement. This figure covers the occasional dining-out experience.
Income Taxes
Retirement does not mean an escape from income taxes. Although some of your Social Security income is tax-exempt, pension income and withdrawals from taxable IRAs are taxable. The BLS reports that retirees still pay around $5,358 annually in taxes to local, state, and federal governments.
Entertainment
After working so hard at a job for so long, you'll want to enjoy your golden years. Most retirees spend nearly $2,898 per year, or $242 per month, on entertainment, covering everything from movie tickets to clubs to pet care to leisure travel.
Clothing
Although you won't need any work clothes in retirement and you'll be able to dress as casually as you like as much as you'd like, you'll still require some clothing. I'm planning to spend around $1,287 per year on new apparel once I retire, which is roughly in line with most retirees.
Miscellaneous
The Bureau of Labor Statistics suggests the over-65 crowd spends an average of $1,052 annually on goods and services they don't think twice about, or even remember. Think things like birthday and holiday gifts, home decor, charitable cash donations, and the like.
Everything Else
That's most of it, but not quite all of it. The rest of the average retiree's annual spending is modest enough to not merit mention as "miscellaneous" spending. These nickels and dimes do add up, though, to a typical annual total of $3,273. This figure can include items like burial insurance, subscriptions, pet care, cellphone service, and the like.
The Numbers Don't Add Up
If you've been paying attention to these probable retirement expenses thus far, you've arrived at a figure of $60,087 annually, or $5,007 per month. Problem? The Social Security Administration reports that this year's average monthly Social Security payment is only $1,976. In fact, even if you're one of the lucky few who reach the maximum possible monthly Social Security payment, that's only a meager $5,108. Neither of these figures reflects potential payment cuts of between 20% and 25% should the worst solvency and sustainability issues with Social Security materialize.
Don't panic! The BLS reports that the typical retiree's annual household income in 2023 was about $64,326, or around $5,360 per month. Although this isn't a massive difference, it's enough to get by.
Clearly, if you intend to retire comfortably, relying solely on Social Security benefits isn't feasible. You'll need to invest money on your own, beyond the government-run program.
The good news is that it's possible for even the most modest of earners to build a nest egg that reduces their eventual reliance on Social Security benefits. Investing as little as $300 per month in an S&P 500 index fund could leave you with more than $600,000 after 30 years. If you can pump it up to $400 per month for 35 years, the end result soars to $1.5 million.
You may not have the luxury of time, or the means, for that matter. Don't stress about that too much, though. Start when and where you can with what you have, even if it's just $100 per month. Your disposable/investable income has a curious way of growing as life progresses. It's better to accumulate on something than start with nothing.
In the meantime, it wouldn't be foolish to consider buying a home outright in retirement and finding a way to limit your household's car ownership to at least one less vehicle. These are the costs taking the most significant toll on retirees' pocketbooks, but they're also the costs that can most plausibly be curbed later in life.
Incorporating the given words into the text, here are two sentences:
Your retirement savings and investments might need to cover a significant portion of your retirement expenses, such as housing, since Social Security may not provide enough income to finance the average retiree's spending of $21,445 per year. Considering retirement, it's crucial to factor in potential finance changes, like the potential reduction in Social Security payments for future retirees, which could affect your retirement spending budget.
