You may have heard it takes a million dollars to get through your retirement years. But before you start wondering where you’re going to get a million bucks, it’s important to know that retirement costs can vary dramatically from one senior citizen to the next. There are things you can do to control your own costs after you leave the workforce, including possibly deciding to continue working at least part-time, doing something you love. To get a better look at what you’ll need to save, though, it can help to know what all of your expenses will likely be.
Average Cost of Retirement
According to the Bureau of Labor Statistics, in 2016, households run by those age 65 and older spent an average of $45,756 per year. That’s about $3,800 a month. When you look at the monthly average for all households, it’s about $1,000 more, so if you want to go by that data, that means you’ll need $1,000 less per month than you’re spending now.
However, life is not about averages. You can very easily estimate the amount you’ll need to live on in retirement based on your own current costs. Of course, if you’re in your 20s and just starting out, inflation will push those costs up significantly by the time you get to retirement. But you can still estimate and assume the amount you’ll have coming in will make up for the increase.
Cost of Housing
One thing that helps retired couples is the lack of rent or a mortgage payment. If you can pay off your home well in advance of leaving the workforce and stay in that home after retirement, you’ll be able to reduce your monthly costs significantly. But even if you own your house, you’ll still be tasked with paying homeowners insurance and property taxes. On average, Americans pay $2,127 each year in property taxes, which averages out to just over $177 a month, but this differs from one area of the country to the next. For homeowners insurance, the average yearly cost is $1,083, which divides up to only $90 a month, but again, the cost can vary widely depending on where you live and the value of your home and other belongings. If you go by the average, though, you can expect to pay just under $300 a month for your home, even if it’s fully paid off.
That assumes you will own a home at retirement. Many choose to move to a smaller place or a warmer climate to enjoy their golden years. If you choose to move to a senior living community to be around others your own age, you may find yourself paying more than you do now, especially when you factor in homeowners association fees. It can be even more if you move into an assisted living facility. On average, you can expect to pay $1,500 to $6,000 a month for such an arrangement, plus the cost of any care you may need.
Cost of Retirement for Couples
When you’re considering average spending in retirement, one of the biggest variables will be whether you’re living solo or with someone. If you’re married and your spouse is still working, your retirement will reduce your monthly household income significantly less than if you lived alone and had to take on the brunt of the expenses yourself. But if you’re both retired, it will be more difficult to live comfortably unless you have substantial savings, or you significantly reduce your monthly expenses.
You’ll both share a home, so you may be able to save on housing costs. However, other expenses will increase to make up for it. Experts estimate a couple will need $280,000 just to cover health care and medical costs over the course of retirement. This doesn’t include the cost of senior living or nursing home care, if that becomes necessary. Other factors that will increase the average cost of retirement are things like vacations, dining out and entertainment expenses. If there are two of you, it’s also important to consider retirement plan cost since you’ll be saving for retirement as a couple and paying fees and taxes on the entire amount.
Building Your Own Budget
To decide how your own costs will compare to the overall average spending in retirement amounts, it can help to set a budget. First, paint a realistic picture of how much you’ll spend on housing, whether it’s rent, a mortgage or just the property tax and homeowners insurance on a place you own. Also calculate how much you’ll spend on transportation each month, including gas and insurance if you own a car, or public transportation if you don’t. If you plan to have a car payment, that should be included in this amount, as well.
Perhaps one of your biggest expenses, outside of a mortgage, will be your health care costs. Budget around $400-$500 a month for that, based partly on the fact that annual health care premiums for the elderly average $4,000 a year on the low end. Fluctuating costs like food and entertainment should also have budget categories, although they can be harder to predict. From there, look at your own monthly expenses and decide if there’s anything you’ll want to have in your budget once you retire.
Saving for Retirement
Once you’ve figured out how much you’ll need to be able to afford retirement, it’s time to decide how you’ll pay for it. You may have opted out of saving for it based on the current retirement plan cost, but even if you can set a little money aside each month, it can help make a difference. Financial planners often recommend setting aside 10 to 15 percent of your annual income, starting in your 20s, but it’s never too late to start putting money into an account.
As for where to put your retirement savings, it can depend on your own goals, as well as much time you have left. If your employer matches your 401(k) contributions, at the very least you should max that out. But the remainder of your retirement savings can go into an IRA. You have two options: a Roth IRA or a traditional IRA. If you’re concerned about how much you’ll have to live on in retirement, you should consider a Roth IRA since you’ll pay taxes now, rather than when you take the money out. That means more of your savings will be in your pocket rather than handed to the IRS. Once you’ve decided the type of account you’d like to set up, shop around and find a provider that offers the lowest retirement plan cost when it comes to fees.
Continuing to Earn
Even if you look at the average cost of retirement and feel overwhelmed, though, consider that you might not retire as early as you think. You may choose to stay at your current job slightly longer than you would have otherwise, adding to the amount of income you’re bringing in year after year. You may decide, after you walk away from your job, that you crave the challenge of working at least part-time every week. Even if you’re bringing in a couple of hundred dollars a month, it can make a difference.
When calculating the average spending in retirement, it’s also important to factor in some travel money. Chances are, you’re looking forward to seeing a little of the world after spending most of your life working. If you want to take the occasional cruise or fly overseas for a tour of Europe, you’ll need to have some extra money in your savings account to pay for it.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.