Busted: Think You’ll Spend LESS in Retirement?

Ready to bust another retirement myth? Here’s one we hear often: “Your living expenses go down once you retire.”

Certainly, there are some expenses — like commuting, lunches out and clothes for work — that will likely drop. If you’ve planned well, you may even have your home paid off by the time you retire.

Here’s where the myth gets busted. Most experts agree that other expenses go up in retirement; sometimes significantly. Many new retirees, for instance, want to do all the things they couldn’t do during their working years. Think hobbies, travel, visiting the grandkids—most of those things cost money.

And don’t forget about health care. According to the Employee Benefit Research Institute, a typical 65-year-old couple would need $283,000 to have a 90% chance of paying for their health care costs during retirement. Those are out-of-pocket costs over and above what Medicare covers.*

What’s interesting is that expenses during retirement tend to change with age. At first, for example, entertainment and travel expenses are typically higher, and health care costs are manageable. As retirees age into their 70s and 80s, they’re not as active. Entertainment and travel expenses taper off. They may decide that they only need one car instead of two.

At the same time, however, health care costs go up. The increase could be significant, particularly if one or both partners need long-term care.

The moral of this busted myth, then, is to plan ahead and run the numbers. Don’t just assume you’ll need less income when you retire. If you assume wrong, you could run out of money too soon.

To get started, meet with a financial professional. Kevin Hansen will talk about that more in his next post.

See our previous Mythbusters posts on:

* EBRI Issue Brief #351, December 2010

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

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  • Cyril

    Good one Joe! maybe there is a decrease in daily expenses but the overall expenses definitly increase. The Challenge here I guess would be to make people visualize the numbers and make a comparative of before retirement and after. I would like to see a table that includes the basics expenses for people below age 65 and on the other part above that age, where we see reflected the decrease in daily expenses and probably an increase in others like hospitalization, doctors visits, medicin…

    • Joe Moklebust, Director Business Development – Retirement Solutions, Principal Financial Group, Principal Funds Distributor, Inc.

      Thanks for your suggestion.

  • Robert Johnson

    Thank you for a very interesting read. Many financial planners use an income replacement ratio of 85% during retirement, which I have always found to be very logical. For example, if an individual is saving 11 to 15% per year throughout their working career towards their retirement, as most retirement readiness studies would suggest, they are actually only living off of 85-89% of their current income today. This is above and beyond some of the other reasons people spend less in retirement you have already mentioned like less lunches out, no commuting to work, or even having a paid off home mortgage.

    However, if the average additional out of pocket healthcare cost for a couple retiring at age 65 is $283,000, perhaps an income replacement ratio closer to 100% might make sense? That $283,000 divided by 2 equals $141,500 per person. If you live for 20 years beyond retirement, that equals $7,075 per person per year in retirement. Now let’s assume that couple earns $50,000 each per year during their working years, that $7,075 equals about 14% of their current pay. That additional 14% for healthcare costs would eliminate the aforementioned savings a couple might expect because they are no longer saving for retirement while they’re retired. Again, healthcare costs alone makes me wonder if using a 100% income replacement ratio isn’t more realistic when it comes to retirement planning?

    One thing is certain, meeting with a financial professional seems like great advice considering how complicated and important the topic.