Are you getting ready to kick back and enjoy retirement? It’s a big step; planning right can mean the difference between worrying about every penny and having enough to enjoy your golden years. Making a solid retirement budget is a big part of that. 

How much does retirement cost in 2023?

Retirement is a significant phase in life that requires comprehensive financial planning. Retirement costs vary significantly based on factors like individual lifestyle, health condition, and geographic location. Nevertheless, the Bureau of Labor Statistics (BLS) provides some insightful data on the average expenditures for retirees.

According to the BLS Consumer Expenditure Survey, in 2023, the average monthly expenditures for single retirees stood at $2,038, whereas for retired couples, it was higher at $3,185. This survey reflects the spending patterns of U.S. households and has shown an upward trend in retirement expenses in recent years due to factors such as rising inflation.

Here is a more detailed breakdown of the average monthly spending for single retirees in 2023:

• Housing: $1,573 (includes mortgage or rent, property taxes, utilities, and homeowners insurance)
• Food: $632 (includes groceries, eating out, and food delivery)
• Transportation: $483 (includes car payments, gas, insurance, and public transportation)
• Health care: $406 (includes premiums, copays, and out-of-pocket expenses)
• Personal insurance and pensions: $321 (includes life insurance, long-term care insurance, etc)

The average monthly spending for couples is higher than for single retirees because couples tend to have higher housing costs and more expensive health care needs.

It’s important to note that these are just averages, and your actual retirement spending may vary depending on your individual circumstances. Factors that can affect your spending include your location, your lifestyle, and your health status.

Retirement spending by age

Ensuring financial stability is a pivotal step in preparing for retirement. An essential facet of this preparation involves gaining insights into how our spending patterns may change as we age. We have conducted an analysis focusing on age-related aspects of retirement expenditure, utilizing data provided by the Bureau of Labor Statistics (BLS).

Distribution of average monthly retirement spending by age 

The BLS data paints a picture of escalating retirement spending as people progress through their golden years:

• Ages 65-74: Individuals within this bracket spend an average of $2,276 monthly. Retirement spending in this age range is typically lower than in later years, as retirees may still be relatively healthy and active. However, healthcare costs can start to increase in this age range.
• Ages 75-84: This demographic sees a spending increase, with an average outlay of $2,731 per month. Retirement spending in this age range tends to be higher due to several factors, including increasing healthcare, travel, and leisure expenses.
• Ages 85 and older: This group experiences the highest spending, averaging $3,414 monthly. Retirement spending in this age range is typically the highest. This is because people in this age group are more likely to have chronic health conditions, which can lead to higher healthcare costs.

It’s essential to remember that these figures represent average trends and that individual retirement expenses may differ substantially. Geographic location, lifestyle choices, and health status can significantly influence retirement spending.

Retirement medical expenses

As you get older, healthcare often becomes one of the most significant expenses you’ll face in retirement. Planning for these costs is essential so you’re aware of the situation. Here are some key things to consider:

1. Medicare: Medicare, the U.S. government’s health insurance program for seniors, typically becomes your primary health insurance provider when you turn 65. It’s important to understand what Medicare covers and what it doesn’t. It typically covers a portion of your hospital stays, doctor’s visits, and other medical services, but deductibles and copayments are involved. Also, some services, such as long-term care, are not covered by Medicare.

2. Medigap and Medicare Advantage: To cover the costs not paid by Medicare, you might need to purchase supplemental insurance like a Medigap policy or enroll in a Medicare Advantage Plan, which often provides more comprehensive coverage. These plans come with additional premiums.

3. Prescription Drugs: Medicare Part D provides prescription drug coverage, but it comes with its costs, including premiums, deductibles, and copayments. The specific costs depend on the plan you choose and the medications you take.

4. Long-Term Care: This is a significant cost that Medicare does not generally cover. Long-term care insurance can help, but it’s expensive, and only some qualify.

5. Out-of-Pocket Costs: You will likely have other out-of-pocket healthcare costs, including vision and dental care (which Medicare generally does not cover), over-the-counter medications, and other health-related expenses.

6. Inflation: Remember to factor in inflation. Healthcare costs tend to rise faster than general inflation, so it’s important to factor this into your retirement savings plan.

7. Health Savings Account (HSA): If you are eligible, contributing to an HSA can be an excellent way to save for healthcare costs in retirement. These accounts enable pre-tax contributions, tax-free growth, and tax-free withdrawals for eligible healthcare expenses.

Here are some additional statistics on retirement medical expenses provided by the CMS:

• The average annual Medicare Part B premium for a retired couple in 2023 is $233.70. This premium is projected to rise by 14.2% in 2024.
• The average annual out-of-pocket spending for a retired couple on Medicare is $6,755. This amount includes copays, deductibles, and other out-of-pocket expenses.
• The average annual cost of long-term care for an individual in the United States is $56,010. For those requiring a high level of care, this cost can be significantly higher.

It’s crucial to remember that these statistics are averages, meaning your personal medical expenses during retirement could be higher or lower. For a precise estimation of your anticipated costs, it would be advisable to seek advice from a financial advisor or a specialist in Medicare. Or you can use a website such as Hella Health to create your Medicare Needs Profile and get a sense of how your unique needs could be met by Original Medicare vs. a Medicare Advantage plan.

Living expenses in retirement

Accurately estimating your future expenses is a fundamental step for retirement budgeting. Understanding the costs of living in retirement is crucial for effective planning. Consider the following expenses:

• Basic living expenses: This includes essential costs like housing, utilities, groceries, and daily necessities.
• Healthcare costs: As discussed previously, factor in medical insurance premiums, prescription medications, and potential long-term care expenses.
• Housing and utilities: Account for expenses related to mortgage payments, property taxes, maintenance, and utility bills.
• Transportation expenses: Consider costs associated with owning a vehicle, such as fuel, Maintenance, and insurance premiums.
• Leisure and entertainment expenses: Plan for leisure activities, travel, hobbies, and entertainment.

Sources of retirement income

Identifying the various sources of income available is crucial for creating a realistic budget for retirement. Consider the following sources:

• Social Security benefits: Understand how your Social Security benefits contribute to your retirement income.
• Pensions and annuities: If applicable, factor in any pension plans or annuities you may receive.
• Retirement account withdrawals: Determine how much you can withdraw from your retirement accounts, such as 401(k) or IRA.
• Part-time work or side hustles: Explore generating additional income through part-time work or side businesses.

Creating a retirement budget

Crafting a retirement budget ensures a clear roadmap for managing finances during retirement. Consider the following steps:

• Assessing your current financial situation: Evaluate your assets, debts, and savings to determine your starting point.
• Setting financial goals for retirement: Identify your desired standard of living and financial objectives for retirement.
• Budgeting for fixed and variable expenses: Allocate essential expenses while considering discretionary expenses too.
• Emergency fund considerations: Set aside a contingency fund to handle unforeseen retirement expenses or emergencies.

Strategies for managing retirement expenses

Implementing effective strategies for managing retirement expenses can help optimize your budget in retirement. Consider the following tips:

• Downsizing and housing options: Explore downsizing your living arrangements or alternative affordable housing options.
• Health insurance and Medicare: Understand different healthcare coverage options and consider insurance premiums and out-of-pocket costs.
• Travel and leisure on a budget: Discover cost-effective ways to enjoy travel and leisure activities during retirement.
• Minimizing debt and credit card usage: Aim to pay off debts and reduce reliance on credit cards for a more stable financial situation.

Maximizing retirement income

Maximizing your retirement income can enhance your overall financial well-being. Consider the following strategies:

• Investment strategies and portfolio management: Develop an investment plan aligned with your risk tolerance and long-term goals.
• Roth conversions and tax planning: Explore tax-efficient strategies, such as Roth conversions, to optimize your retirement income.
• Working with financial advisors: Seek guidance from qualified financial advisors to make informed decisions and maximize your retirement income potential.

Adjusting the retirement budget

Retirement budgeting is an ongoing process that requires periodic adjustments. Factors to consider include:

• Adapting to changing financial circumstances: Regularly review and adjust your retirement budget to reflect changes in your financial situation.
• Dealing with inflation and rising costs: Account for inflation and growing expenses when planning your retirement budget.
• Regularly reviewing and revising the retirement budget: Evaluating your budget to ensure that it aligns with your goals and adapts to your evolving needs is essential.

Retirement budget example

Basic Living Expenses:

• Housing: $1,500
• Utilities: $200
• Groceries: $400
• Insurance (Health, Home, etc.): $300
• Other Essentials: $200

Healthcare Costs:

• Medicare Premiums: $150
• Prescription Medications: $100
• Medical Supplies: $50
• Long-Term Care Insurance: $200

Housing and Utilities:

• Property Taxes: $300
• Home Maintenance: $200cost of living in 
• Water and Sewer: $50
• Electricity and Gas: $100

Transportation Expenses:

• Car Insurance: $100
• Fuel and Maintenance: $200
• Public Transportation: $50

Leisure and Entertainment Expenses:

• Travel: $300
• Hobbies and Activities: $150
• Dining Out: $200
• Entertainment: $100

Social Security Benefits: $1,500

Pensions and Annuities: $1,000

Retirement Account Withdrawals: $1,200

Part-time Work or Side Hustles: $500

In this example, the retiree’s monthly typical retirement budget is created using estimated expenses across different categories. It covers essential items like housing, utilities, and groceries, as well as discretionary expenses like travel and entertainment. The retirement income comprises Social Security benefits, pensions, annuities, withdrawals from retirement accounts, and potential part-time work or additional income.

Please note that this is only an example. Actual retirement on a budget will vary based on individual circumstances, lifestyle choices, and location. Customizing your retirement budget is crucial to accurately reflect your needs and financial situation.

Conclusion

Creating and managing a retirement budget is critical to achieving financial security and enjoying a fulfilling retirement. By estimating expenses in retirement, identifying income sources, implementing effective strategies, and regularly reviewing your budget, you can confidently navigate the financial aspects of retirement. Start planning today for a safe and rewarding retirement journey.