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Retire, live on 20 percent less?

By Jennie L. Phipps ·
Tuesday, July 17, 2012
Posted: 4 pm ET

How much will you actually spend after you retire?

No matter how much retirement planning you do, it's still hard to guess what it will cost you to live after you hang up your work boots. But here's a hint: According to a recent analysis of spending patterns of people 65 and older, people living in retirement spend 20 percent less on average than they did when they were working.

The numbers are from a survey conducted on behalf of the U.S. Department of Health and Human Services by the University of Michigan. The analysis is thanks to Sudipto Banerjee, a research associate with the nonprofit Employee Benefit Research Institute in Washington, D.C.

Banerjee found that home and home-related expenses are the biggest chunk of older people's budgets -- between 40 and 45 percent.  But that's not a static number. Between age 65 and 75, household expenditures fall by 19 percent. By the time people reach 85, household costs fall 34 percent. And for people who live to be 95, these costs are reduced by 52 percent.

Health-related expenses are the second-largest line item in the budget of older Americans, and it is the only component that steadily increases with age. Health care expenses are about 10 percent of what people between ages 50 and 64 spend, but they increase to about 20 percent for those 85 and older.

The rest of the expenditure, including transportation (car payments, insurance, gas and maintenance); clothing, personal care products and services (like going to the barber); entertainment (vacations, event tickets, hobbies, dining out, etc.); and a big other category (gifts to organizations and family), all remain flat or down only slightly, even as we age.

Banerjee says two factors make a big difference in the ability to live comfortably in retirement:

  • Eliminating a mortgage reduces housing costs significantly, giving people more freedom to spend money on other things.
  • Long-term care insurance appears to offer a sense of security because people at all income levels who purchase it spend more money compared to counterparts who don't have long-term care.

"There is lots of research being done on the accumulation side of retirement planning, but very little research is being done on the expenditure side," says Banerjee. "But I think it is equally important to consider that."

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