Many Americans work hard their whole lives to save for a worry-free retirement, one in which free time is high and expenses are low. The reality is that even with a low-key retirement, you’ll still have plenty of bills to pay.
But don’t let fears of future expenses ruin your dreams of a joyful retirement. By knowing what lies ahead, you’ll be able to take steps to budget for these costs so they don’t come as an unwelcome surprise.
Between watching TV and movies via streaming services, video conferencing with friends and family and paying your bills, you’ll likely still want or need an internet connection, even in retirement. While the average monthly internet bill is about $65, you likely can pay less via a senior or low-income plan, or if you choose a slower connection.
Medicare can cover a lot of your medical expenses during retirement, but it’s usually not entirely free. Although most people don’t pay a premium for Part A, which is hospital insurance, those who have to buy it pay between $274 and $499 per month.
For Part B, which is medical insurance, premiums start at $170.10 but can go higher based on your income. If you want Medicare Part C, Medicare Advantage or Part D Medicare Prescription Drug Coverage, your monthly premiums will vary by the plan you choose.
If you own a home in retirement, as nearly 80% of Americans age 65 and older do, you’ll likely have to budget for a host of housing-related bills. While you may no longer have to pay a mortgage, you’ll still be responsible for property taxes, which tend to go up every year, and possibly HOA fees.
Maintenance and repair costs also tend to run about 1% of the value of your home every year. Add in other expenses such as utilities and insurance, and housing-related bills likely will comprise your single largest category of retirement expenses.
Many retirees, particularly older ones, will find themselves in need of long-term care. Unfortunately, this can be one of the largest retirement expenses you will face.
According to the U.S. Department of Health and Human Services, someone turning 65 has an almost 70% chance of needing some type of long-term care services in their lifetime. Monthly median costs of care can range from about $5,000 for a home health aid or an assisted living facility to over $9,000 for a private room in a nursing home facility, according to insurer Genworth.
Having a long-term care policy in place before you need these services may be a smart move to reduce your total expenses.
Common wisdom suggests that throughout your working life, you should keep three to six months of expenses in an emergency fund. Once you retire, however, you’ll likely want to bump up that amount. Generally speaking, accidents occur more often as we age, whether through accidental falls, reduction in driving abilities, loss of general dexterity or simply through spending more time at home rather than in an office. The best way to plan ahead for emergency expenses in retirement is to build up your nest egg while you’re working, rather than making it a monthly line item in your budget.
Even if you’re relatively healthy, your prescription costs are likely to increase throughout your retirement. However, you may be able to get some of your prescriptions covered if you join a Medicare prescription drug coverage plan.
Costs can vary, depending on where you live and what your income is, so you’ll have to do some homework to calculate your prescription drug budget when you retire.
According to the most recent data from the Bureau of Labor Statistics, the average annual expense on food per consumer unit was $7,316 in 2020. Per BLS terminology, a “consumer unit” is the official terminology for a household, family or single person living alone.
Based on this information, the average retiree could expect to budget about $610 per month for food. However, understand that you’ll likely have to tweak this figure based on your own personal consumption patterns, whether you live in an expensive area and how severely inflation has affected food prices where you live.
Taxes are typically much lower in retirement than in your working life. However, your tax rate can vary wildly depending on your financial situation. Although you’ll likely have taxable distributions from various retirement plans, such as IRAs or 401(k)s, and even a portion of your Social Security income may be taxable, you won’t be drawing a salary. Your tax rate also will vary depending on whether your state has income taxes. Overall, however, you’re likely looking at taxes of between 0% and 20% on your income.
Hopefully, you’re out of debt by the time you retire. But it’s possible you still may have outstanding credit card debt, auto loans or a home mortgage. If that’s the case, you’ll clearly have to budget for at least the minimum payment on a monthly basis.
If you have excess funds, it’s likely in your best interest to reduce your debt as much as possible, particularly for consumer debt such as credit cards.
According to BLS statistics, the average consumer unit spends $243 per month on entertainment. While this is a good starting point for your budget, personal entertainment expenses can range from very little per month to $1,000 or more, depending on your lifestyle. Some retirees plan to take the entertainment budget they had while working and add 20% to 50% to it, as the additional free time afforded by retirement often translates to increases in travel, family visits, going out to the cinema and so forth.
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