5 Biggest Expenses for Retirees & How to Minimize Them

Download Now: 2024 Retirement Planning Guide

To view the most recent version of this article, click here.

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

One major assumption people have about retirement is that they’ll spend less than they did before they hit this milestone. While this may be true in many cases, the spending difference is not as significant as one may think.

According to the latest Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics, the average retiree household (led by someone age 65 or older) spends $50,220 per year. By comparison, the average annual spend across all households is $63,036.

While some expenses such as payroll taxes (if you’re not working), commuting costs and disability insurance often disappear in retirement, many others do not. Here’s a list of the biggest expenses the average household encounters during retirement and some tips on how to minimize them.

Housing

Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees. More specifically, the average retiree household pays an average of $17,472 per year ($1,456 per month) on housing expenses, representing almost 35% of annual expenditures. For comparison’s sake, the average U.S. household spends $20,679 annually ($1,723 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. If you decide to go this route, just ensure you receive a realistic estimate of what your home is worth and factor in closing costs and taxes. It’s not uncommon for sellers to reap less than what they had originally anticipated.

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 $7,492 a year ($624 a month) versus $10,742 ($895 a month) for the average U.S. household when it comes to transportation costs. Since this category is often overlooked by many, having a meaningful discussion about the same is critical for retirees—especially when you consider that almost 80% of seniors over age 65 live in car-dependent suburban and rural communities according to Transportation for America, an advocacy organization.

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 $6,833 per year (or $569 per month) versus $5,193 for the average U.S. household. Health insurance makes up the bulk of this cost across all households.

For starters, it’s a good idea to seek out a broad understanding of everything Medicare covers (and doesn’t cover) before you retire. Doing so can potentially save you hundreds of dollars a year.

Medicare consists of four parts that each cover 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, and you can click here to read all about this as well as Medicare as a whole.

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.

Food

This includes items purchased to eat at home as well as dining out. Retiree households spend an average of $6,599 ($550 a month) on food, compared to $8,169 annually ($681 monthly) for the average U.S. household. Almost 40% of retiree spending is for dining out.

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 $3,810 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: how much retiree households spend in a year

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! (2021 Edition)