Biggest Expenses for Retirees & How to Minimize Them

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Biggest Expenses for Retirees—And How to Minimize Them! (2021 Edition) financial planning investment management CFP independent RIA retirement planning tax preparation financial advisor Ridgewood Bergen County NJ Poughkeepsie NY fiduciary

The COVID-19 pandemic recently created a tangible shift in personal consumption: with average household consumer spending dropping from $63,036 in 2019 to $61,334 in 2020 (based on the most recent Consumer Expenditure Survey data from the U.S. Bureau of Labor Statistics).

A similar decrease occurred within average retiree households (led by someone 65 or older), with annual spending dropping to $48,872 from $50,220. While overall spending dipped, retiree households still shelled out $4,073 a month: a large number considering one in four Americans rely on Social Security for over 90% of their income. The data also proves that spending doesn’t diminish as significantly as one may think during retirement.

Check out this list of the biggest expenses the average household encounters during retirement, along with a few tips on how to minimize them.

Housing

Housing expenses—which include mortgage, rent, property tax, insurance, maintenance and repair costs—remained the largest expense for retirees. More specifically, the average retiree household pays an average of $17,454 per year ($1,455 per month) on housing costs, representing over 35% of annual expenditures. Comparatively speaking, the average U.S. household spends $20,091 annually ($1,674 per month) on housing: representing approximately 33% of total annual expenditures.

A recent Harvard University Joint Center for Housing Studies report claims that 46% of homeowners between the ages of 65-79 (and one in every four people aged 80+) are still paying off a mortgage. Moreover, according to an American Financing survey, many respondents believe they may never pay off their mortgage. In contrast, 34% of those aged 65-79 (and 3% of those aged 80+) had mortgages in 1990, so it’s obvious that Americans today have less aversion to debt than they did just a few decades ago.

Paying off your mortgage and building equity prior to fully retiring is not only a good first step but one of the smartest things you can do to keep your living expenses in check after you stop working—giving you more breathing room when it comes to other costs. Alternatively, you can look into downsizing your home to completely sidestep any mortgage debt.

Transportation

While commuting expenses will undoubtedly shrink when you retire, not all transportation expenses will follow suit. This category includes vehicles, gas, insurance, maintenance and repairs, car rental, leases, payments and public transportation.

The average retiree household spends $6,819 a year ($568 a month) versus $9,761 ($813 a month) for the average U.S. household when it comes to transportation costs. These numbers were down approximately 8.5% across all age groups in 2020, as the impacts of COVID-19 meant people spent a lot less time driving and commuting to work than usual.

Despite reduced expenditures, this category is often overlooked by many. Therefore, engaging in a meaningful discussion about transportation expenses is critical as you prepare for retirement—especially for those set to live on a fixed income. When you consider that almost 80% of seniors over age 65 live in car-dependent suburban and rural communities (according to advocacy organization Transportation for America), these conversations become even more imperative.

Shopping around annually for auto insurance is one of the best ways to save money. Alternatively, hailing rides from services like Uber or Lyft—especially if you don’t have daily car needs—can help you save compared to traditional car ownership.

Healthcare

Healthcare—which includes health insurance, medical services, supplies and drugs—ranks third on the “biggest expenses” list for retiree households, who spend an average of $6,749 per year (or $562 per month) versus $4,968 for the average U.S. household. Health insurance premiums make up the bulk of this cost across all households.

Soon-to-be-retirees should have a broad understanding of what Medicare covers (and doesn’t cover) prior to retiring. Doing so can potentially save hundreds of dollars a year.

Medicare consists of four parts, with each one covering specific services. Under Medicare Part A and Medicare Part B—known as “Original Medicare”—the government pays providers directly for services received. Almost all doctors and hospitals in the United States accept Original Medicare. You can read all about Medicare here.

You should also familiarize yourself with long-term care. Whether you need a policy or not, you should, at a minimum, understand what it covers and what your options are—also familiarizing yourself with out-of-pocket costs (if you aren’t covered) to incorporate these into your retirement plan.

Finally, preventive care such as engaging in consistent exercise and healthy eating practices is another way to potentially save money on healthcare costs: especially prescription drugs.

According to various sources such as WebMD, about 30 minutes of daily activity that gets your heart going and blood pumping (such as a brisk walk) can benefit you greatly. Specifically, doing so can help lower your blood pressure, keep your bones, muscles and joints healthy, ease symptoms of depression or anxiety, reduce your chances of heart disease and better manage chronic conditions like diabetes and arthritis.

Food

The food category includes items purchased to eat at home as well as dining out. Retiree households spend an average of $6,137 ($511 a month) on food, compared to $7,923 annually ($660 monthly) for the average U.S. household. Overall numbers for each group fell during the pandemic due to COVID-19 restaurant restrictions.

Some tactics you can use to save money on groceries including clipping coupons, making and sticking to shopping lists, buying store brands, shopping at stores that offer senior citizen discounts and using a credit card (or app) that offers a strong cash back or points accumulation program for grocery purchases. While dining out less frequently is certainly an option to help curb food expenses, you’ll need to strike a balance—especially if you dine out with others as a social activity. After all, relationships are one critical factor needed for a happy retirement.

Utilities

The fifth-largest retiree household expense is utilities. This category includes bills such as gas, electricity, water, phone and Internet charges. Retiree households spend an average of $3,797 annually versus $4,055 for all households with respect to these costs.

It is in fact possible to reduce utility bills, such as by installing a programmable thermostat and using LED bulbs. Check out this AARP article on 13 ways to save on these expenses.

In sum: retiree household spending

As you can see, expenses do drop in retirement for the average household but not as significantly as many anticipate. Therefore, it’s critical to get these costs under control before you retire and account for them in your retirement plan. Your financial advisor can help you think all of this through and guide you to ensure you are best prepared, accordingly.

Biggest Expenses for Retirees—And How to Minimize Them! (2022 Edition)