When we think about retirement, it's easy to assume that our expenses will naturally go down once that milestone kicks off. After all, many seniors enter retirement mortgage-free, and many of the costs associated with having a job go away. But while you might see your living expenses drop a bit in retirement, a substantial decline is less likely. And unfortunately, older Americans are fairly misguided in this regard.
The Insured Retirement Institute reports that the average American aged 65 to 74 spends $55,000 a year. Most baby boomers, however, think they'll need far less to live on in retirement. A good 44% of older Americans think they'll get by in retirement on less than $35,000 annually, and only 30% of boomers expect to need $55,000 a year or more.
If you're expecting your living costs to decline dramatically in retirement, consider this your wakeup call that they probably won't. And then start saving to allow for that fact.
What will your senior living expenses look like?
Chances are, the bills you grapple with before retirement will look very much like the bills you face once that period kicks off. Save for commuting costs and other incidentals associated with having a job, the rest of your bills are likely to stay largely the same once retirement begins. After all, you'll still need food, clothing, transportation, utilities, and a roof over your head. And while you might manage to pay off your mortgage in time for retirement, that savings could easily be offset by increasing property taxes, insurance, and maintenance and repair costs.
Furthermore, some of your living expenses might actually go up in retirement. Take healthcare, for example. According to Fidelity, that alone will cost the average healthy 65-year-old couple today $285,000, and that doesn't even include the cost of long-term care, which 70% of seniors end up needing.
There's also leisure to consider. The interesting thing about going to work is that it's a fairly inexpensive activity. You may be tempted to grab lunch with your colleagues, but otherwise, it's a cost-effective way to occupy most of your waking hours. Once you're retired, on the other hand, you'll need to fill every hour of every day, and chances are, it won't come cheap.
That's why you need serious savings for a shot at a comfortable retirement, and if you're already in your 50s or beyond, your window to accumulate some is narrowing. Still, that doesn't mean all is lost. If you make a point of cutting back on living expenses to free up cash, you can amass a decent nest egg even if retirement isn't all that far away. Case in point: Socking away $1,000 a month for 15 years will leave you with just over $300,000 if your invested savings generate an average annual 7% return during that time (that's a reasonable assumption if you're willing to go heavy on stocks).
If you can't manage that level of savings on your current salary, get yourself a second job for a while. Of the millions of Americans who hold down a side hustle, 14% say they do so to fund a retirement account.
Finally, you might consider postponing retirement if your savings aren't in a good place and you need more time to catch up. Not only will that allow you to add to your nest egg, but you'll be able to leave your existing savings alone for longer.
Don't go in clueless
It might seem comforting to approach retirement with the notion that your bills during that time will be substantially lower than they are at present, but that line of thinking will only get you into financial trouble down the line. Rather than kid yourself, map out a realistic retirement budget based on what your expenses look like today, because they're a pretty good indication of the costs you'll be facing down the line.