Retirement Spending: Are Americans Way Off on Monthly Expectations?
Written by
Jake Safane
Edited by
Ashleigh Ray
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You might think managing your money in retirement is easy. After paying off your house and limiting (or even cutting) the financial support for your children, you might even be feeling pretty secure.
This could explain why a recent GOBankingRates survey found that 42% of Americans plan to live on $1,000 or less in retirement, aside from housing. But even if you fall into the 6% of survey respondents who plan to spend more than $5,000 per month in retirement, aside from housing expenses, you still might not be setting a realistic expectation.
When it comes to accurately estimating your monthly spending in retirement, there are numerous aspects to consider. Keep reading to see what the experts have to say.
Unrealistic vs Realistic Expectations
“The majority of people will underestimate as opposed to overestimating how much they will spend on a monthly basis,” said Chris Orestis, president of Retirement Genius. “It takes a concerted effort to establish a monthly budget and discipline to stick with it to stay in the black.”
Part of the problem is that people often don’t have full visibility into their expenses. If you don’t know how much you spend each month, it can be hard to set a realistic retirement budget.
Sallie Mullins Thompson, a tax strategist and CEO of Sallie Mullins Thompson, CPA PLLC, said that many people don’t have an accurate idea of what they’re spending.
Mullins Thompson added, “Sometimes this is because they are not regularly tracking all their expenses. Cash ones are most likely to be missed.”
Irregular or non-monthly expenses can also throw off expectations. For example, you might spend a certain amount of money each month on dining out, but then one-off expenses like a new pair of eyeglasses or an annual credit card fee can throw off your monthly budget. So, it’s a good idea to set aside some extra funds for these types of expenses.
“Despite anyone’s best efforts to stay on budget, unexpected issues will arise such as home or vehicle repairs, medical needs or emergencies or a drop in income,” said Orestis.
An Accurate Budget
Rather than assuming your retirement spending will significantly drop in retirement, you would be better off looking at your current annual expenses and basing a monthly budget on that.
“I tell my clients to plan that they will spend a similar amount as before retirement, with the applicable cost-of-living adjustments,” said Mullins Thompson.
More specifically, you might want to calculate what your spending has been in recent years to determine a realistic monthly retirement spending expectation, especially if you’re close to retirement age.
According to Mullins Thompson, “To plan a retirement budget, one needs to have actual figures on an annual basis for one to two years.”
And it’s important to then test your budget in the real world and adjust accordingly, as even with good intentions, plans can change.
“Once the budget is created, then on a monthly basis, compare the actual spent to the budget,” she continued. “Determine reasons for any discrepancies and make any needed adjustments for the next month. After doing the actual-to-budget comparison process for 12 months, the person should have some useful figures to use for future budgets.”
Lowering Expenses
If you’re finding it difficult to make the numbers work, you might need to take steps like moving to a place with a lower cost of living in retirement.
The same GOBankingRates survey found that 60% of Americans plan to move in retirement. Out of all the respondents, 73% said cost is a consideration of where to live in retirement. For 25%, cost is the most important factor for where to retire.
Moving to an area with a lower cost of living is a great way to reduce the risk of going over budget without severely altering your spending habits.
Increasing Savings
While it’s possible to live richly on a modest retirement income, you’d probably feel more comfortable retiring with a nest egg closer to $1 million or more. This way, you can potentially dip into savings or set a larger spending budget if your retirement spending expectations are off. Of those who answered the survey, 21% have this goal.
However, it’s worth noting that the percentage of people with no retirement savings goal at all increases with age. Only 12% of those ages 18-24 said they don’t have a retirement savings goal, compared with 42% of those ages 55-64 and 56% of those ages 65+.
This could reflect that some lose hope of reaching a certain retirement number as retirement age nears, but it also highlights the importance of thinking about retirement spending early.
If you invest $900 per month for 30 years at a 7% annual return, you would have over $1 million saved. But if you start at age 55 and only invest for 10 years until age 65, you’d need to put away over $6,000 per month to reach over $1 million, which isn’t very realistic for most people.
Methodology: GOBankingRates surveyed 1,395 Americans aged 18 and older from across the country between February 26 and February 28, 2024, asking twelve different questions: (1) Do you have a specific retirement savings goal?; (2) Will you need to work part time in retirement?; (3) In retirement, what type of housing/living situation would/do you prefer?; (4) How important is/was proximity to family and friends in choosing a location to retire?; (5) Are you considering downsizing in retirement?; (6) Do you plan to or did you move for your retirement?; (7) Where is your ideal location for retirement?; (8) Which of the following will you consider/considered when deciding where to live in retirement? (Select all that apply); (9) What is the MOST important factor in deciding where you want to retire?; (10) What are you looking forward to in retirement?; (11) How much do you plan to spend monthly in retirement (outside of housing/rent)?; and (12) Which of the following countries would you be most interested in spending your retirement?. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
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