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Planning for Retirement: Key Insights and Tips

Predicting your retirement spending is crucial for effective retirement planning. While it can be challenging to estimate, recent data from the Bureau of Labor Statistics (BLS) can provide a useful starting point. According to the BLS, American households led by individuals aged 65 and older spend an average of $4,345 per month. Here’s how this information can help you plan your retirement.

Average Retirement Spending and You

In 2021, the BLS reported that households headed by people aged 65 or older spent an average of $52,141 annually, or $4,345 monthly. This includes expenses for housing, food, utilities, household operations, clothing, transportation, health care, entertainment, and miscellaneous items. Notably, households led by younger retirees (ages 65-74) spent more ($4,870 monthly) compared to those led by individuals aged 75 and older ($3,813 monthly).

Your Spending Will Differ

While BLS data offers a general idea, your personal spending will likely vary. Factors such as your location, whether your home is paid off, travel plans, and health care costs will influence your expenses. Living arrangements, such as having a spouse or roommates, can also impact your budget. Using your current budget to project future expenses is a more accurate method for estimating your retirement spending.

How Much Should You Have Saved for Retirement?

Ideally, your retirement savings should cover your expenses from retirement until the end of your life. However, several unknowns can complicate this calculation, such as unexpected expenses, lifespan, and fluctuating interest and investment earnings. The “4% Rule” suggests that you can safely withdraw 4% of your retirement savings in the first year and adjust for inflation annually for 30 years without running out of money. For example, to cover an average annual expense of $52,141, you would need approximately $1,303,525 in savings.

Should You Count on Social Security in Retirement?

As of April 2023, the average monthly Social Security check for retired workers was about $1,786. While this amount may vary, it typically covers over 40% of average monthly expenses. To cover the remaining $2,559 monthly, or $30,709 annually, you would need around $767,725 in retirement savings, following the 4% rule.

Tips for Cutting Expenses in Retirement

Retirees often spend the most on housing, transportation, and health care. Here are some strategies to reduce these costs:

1. Cut Your Housing Expenses

Housing is the largest expense, averaging $1,573 per month. Consider paying off your mortgage early, downsizing, taking in roommates, or moving in with family to reduce costs.

2. Sell Your Car—or Your Second Car

Maintaining a car involves various costs. If possible, sell your car or second car and consider moving to a location where walking and public transportation are viable options.

3. Plan for Health Care Expenses

According to Fidelity, an average retired couple aged 65 in 2022 may need around $315,000 in after-tax savings for health care expenses. Consider using a health savings account to build reserves and seek free counseling from your state’s State Health Insurance Assistance Program (SHIP) to choose the best Medicare plan.

The Bottom Line

While average retirement spending data can provide a rough estimate, detailed calculations based on your current budget are essential. Consider consulting a financial planner specializing in retirement planning to develop a comprehensive retirement spending plan that aligns with your budget and vision for a comfortable retirement.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial future with confidence.

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