Understanding Your Wealth
INCOME EXPENSES
ASSETS LIABILITY
Expenses
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Of the four components to your financial picture , your spending is arguably the one you have the most control over . Success or failure in this category isn ’ t determined by outside forces like interest rates or market performance : Your spending is entirely up to you , and the decisions you make in this category directly affect the other three .
Spending in retirement can be broken down largely into four discrete categories : living expenses ( including housing ), transportation , healthcare , and food and entertainment .
LIVING EXPENSES
These expenses comprise spending related to housing , like a mortgage , property taxes , insurance , utilities and repairs . It also includes regular maintenance – which is something a lot of retirees and preretirees overlook . If you plan on staying in your house for 20 or 30 years in retirement , for example , you need to plan for big-ticket expenses like replacing the roof and swapping out appliances . A good rule of thumb is to anticipate spending 1 % of your home ’ s total value on repairs each year , or more if you have an older property .
TRANSPORTATION
For many people , the early years of retirement are characterized by lots of travel , either visiting family or just vacationing . If that sounds appealing to you , be sure to plan on budgeting for transportation . That means that transportation costs can be a major expense , especially early in retirement . That includes not only automobiles ( which , like the roof , you might need to replace multiple times ) and maintenance , but also gasoline , insurance and airfare .
As we discuss in the sidebar , when mapping out expenses , it might be helpful to remember that different phases of retirement have different financial needs . According to reporting by SoFi , people aged 65 to 74 spend $ 7,851 per year on transportation on average , compared to $ 4,963 per year for people 75 and older . 29 As you make your own retirement plans , consider what travel you ’ ll like to do , but also where you ’ d like to live when you are less interested or able to make long trips in the car .
HEALTHCARE
Healthcare costs have risen steadily over the past 50 years .
Source : KFF analysis of National Health Expenditure ( NHE ) data . 30
Healthcare is one of the few areas where retirees outspend the national average . Whether it ’ s due to chronic disease like arthritis or Alzheimer ’ s , injuries from falling or just the body wearing down , reitrees should expect to spend more on heathcare than they have at any other time in their lives . A 2015 National Bureau of Economic Research working paper reported that medical expenses tend to more than double between ages 70 and 90 , with average medical spending exceeding $ 25,000 per year for those in their 90s . 31
One way to combat the high price of healthcare in retirement is through lifestyle choices . For example , a study in the New England Journal of Medicine found that healthcare costs for smokers can be as much as 40 % higher than those for nonsmokers . 32 A 2020 Lancet study reported that among 84 modificable risk factors , high body mass index and high cholesterol resulted in the greatest healthcare spending among people aged 45 to 64 and those 65 and older . 33 Making lifestyle changes before entering retirement can not only create a higher quality of life , but it can also reduce how much you spend on healthcare .