When I recently told a former colleague who's nearing retirement that seniors commonly need 70% to 80% of their former income to cover their living costs once they stop working, he was quick to argue that my figures were highly exaggerated. For one thing, he expects to have his home paid off, and that alone is apt to lower his spending come retirement. Between that and not having to pay to commute, he's bound to save a decent chunk of money compared to his current expenses.
Now he does have a point. And it is very common for seniors to see their regular spending go down once retirement kicks off.
But you may not end up shrinking your spending as much as you expect to in retirement. Here's why.
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1. Your healthcare costs might rise
As people age, health issues tend to arise. This is one of those biological things we can only fight back against so much through diet and exercise.
Now a big misconception is that Medicare makes it possible for seniors to get health coverage in an affordable manner. The reality is that while Medicare might be less expensive than private insurance, it's expensive nonetheless. And there are also a host of services that Medicare (at least original Medicare, as opposed to Medicare Advantage) won't pick up the tab for.
So all told, you may find that you end up spending more money on healthcare once your senior years roll around. That could easily offset the savings you reap by not having to gas up your car for a 40-mile round-trip to the office every day.
2. You might spend more to maintain an aging home
Many seniors are able to pay off their mortgages ahead of retirement. But even if you're not sending a loan servicer a monthly check, there are many other housing expenses that could increase during your senior years.
First, there's property taxes. Those hinge largely on the value of your home. So if property values rise in your area, your bill might follow suit.
Then there's maintenance. Just as people tend to have greater healthcare needs as they age, homes tend to require more work and more repairs. So what you save on your mortgage payments, you might spend to keep your home standing.
Plus, physical maintenance can be tough on an aging body. So in addition to your home requiring more upkeep, you might also have to pay to outsource that maintenance to someone who's more equipped to handle it.
3. The cost of staying busy could end up being higher than expected
Going from a full-time work schedule to days of freedom isn't as fabulous as it sounds. The reality is that many seniors find themselves bored and unhappy once they're no longer so busy. And so you may feel compelled to keep yourself occupied during the hours you normally would've been at the office.
But there are only so many free or low-cost activities you can do to fill 40 hours or more per week. So you might end up spending more money than expected to keep yourself entertained.
Make sure to save as much as you can
Clearly, there are plenty of reasons why your retirement spending might end up being higher than anticipated. So if you want to avoid a financial crunch in light of that, boost your savings while you can.
If you're in your 50s now with a decade of work to go until retirement, take advantage of catch-up contributions in your 401(k) or IRA. And if you're younger with piles of bills to tackle, at least start contributing something to a tax-advantaged retirement plan, even if it's only $50 or $75 a month.
It's a big myth that retirement is a gloriously inexpensive period of life. You might spend less than what you're spending now all in, but you might still need to replace most of your pre-retirement income to maintain the lifestyle you want. Save accordingly so that becomes a possibility for you once your career ends.
