The Average American Household's Discretionary Income, by Age and Pay: Where Do You Stand?

Discretionary income is a funny term -- people can't agree on a uniform definition. The simplest is "all the money you have left after paying for taxes and your absolute needs." In other words, it's your "fun money" -- what you have left to either save or splurge on at the end of every month.

But when we try to compute discretionary income, dissension abounds. Some say healthcare should be included -- others don't. Some argue that costs for shelter should only be included up to a point -- as a millionaire who lives by himself in a mansion is clearly buying far more than his "absolute needs."

Image source: Getty Images.

Unfortunately, the Bureau of Labor Services (BLS) -- which provides the most detailed and accurate data we have on consumer expenditures -- doesn't give us such clear-cut answers. Instead, it simply breaks down how much Americans make and where they spend it.

So I set out to at least get a ballpark idea for how much discretionary income the average American household gets. If you're looking for the simplest answer possible, the answer is this: $20,748. In other words, the average household has about $1,729 left over after paying the bills each month. That money can be spent or put toward a number of different long-term savings goals -- like retirement or a college education.

But this represents the mean discretionary income -- a figure highly skewed by the highest earners in America. Unfortunately, the BLS doesn't offer median figures. To help make the data more digestible and give you a better idea for where you stand, I first dissected the numbers by age. I then included spending for various aspects of "necessary" spending. Here's what I found:

Discretionary Income by Age | Create column charts

Digging a little deeper, you can see that spending increases in almost every category as you age, up until around age 55, and then it starts to fall. The only category with a continual upward trend is healthcare spending. Both of these make sense, as household expenses likely fall as children move out of the house, and healthcare expenses increase as one gets older.

But I don't think this actually provides a very good snapshot of the average American household's discretionary income, either. That's because, again, these are mean -- not median -- figures. There are millionaire and billionaire households in almost every age group over 25 that materially skew these averages.

A different way of looking at discretionary income
I find it most illuminating to look instead at discretionary income based on how much a household brings home in pay every year. The BLS does this by breaking the American public down into deciles -- or 10 equally weighted groups of income. To find out which decile your household fall into, check out the chart below:

Data source: BLS. Income is before taxes.

When we break the data down in this fashion, we can see how much the high earners skew the data. For instance, almost 70% of American households actually have less than the mean discretionary income of $20,748. Here's how it all breaks down:

Discretionary Income by Income Decile | Create column charts

Clearly, the top earners have a huge impact on the overall numbers.

It's important to remember that not all discretionary income goes toward savings. A lot of it will go toward Christmas presents, vacations, eating out, phone bills, alcohol, sporting events, movies, furniture and household appliances, and fees for education or children's groups.

This helps better explain why the average American family has such a tough time saving for retirement. When you subtract all of the above away from one's discretionary income, there might not be much left for retirement.

What you can do
The equation for a successful retirement is still very simple: Spend less than you earn and invest the difference -- the earlier you get started, the better. If you're looking ways to cut costs, there are a few key decisions that can help you leverage your earnings:

• Don't buy "all the house you can afford." Instead, find your level of "enough," and keep it at that.
• When buying cars, avoid buying new -- focus on reliable used cars.
• Live where you work -- it will cut down immensely on transportation costs and the time and emotional costs of commuting.
• Fund your retirement first and your kids' education second -- otherwise, they'll be paying much higher costs for your needs well into your "retirement."

Beyond that, it's important to maximize the benefits you can get from Social Security. In the end, no one cares more about how you'll do in retirement than you, so take this task by the horns while you still have time, and save as much of that discretionary income for the days when you'll really need it.