What Expenses Decrease In Retirement?

If you are like most preparing for retirement, you have likely tried to guess what your expenses in your retirement might look like. This is important to figure out for several reasons including trying to calculate how much you need to save for retirement. You may have assumed that your future expenses will be between 70% and 80% of your current income. Your gut may tell you that this doesn’t feel right. Why should my future expenses have any correlation to my current income? Your gut would be right. Especially for high earners, your future annual expenses may be significantly less than your current annual earnings.
The best way to determine your annual retirement expenses is to accurately determine your current expenses and then add and/or subtract different categories of expenses that you expect to change in retirement. For instance, you might add to your current traveling expenses for those trips that you always dreamed of taking. Maybe expenses for eating out increase since you’ll have more time to enjoy eating out with friends. But what expenses will be decreased or disappear completely in retirement? Let’s take a closer look.
Housing
Your housing expenses likely represent a large percentage of your current expenses. While your housing expenses won’t disappear in retirement, it is likely that these expenses will decrease, perhaps significantly. Hopefully, as you get closer to retirement, you have paid off or nearly paid off your mortgage. Even if your mortgage is not yet paid off, you may consider downsizing your home now that the kids are out of the house and on their own. If you sell the large house, pay off the remaining mortgage, and purchase a smaller home with the remaining cash, your mortgage payments will be a thing of the past. Your mortgage payments will no longer be a part of your annual expenses. Perhaps, in addition to downsizing your home, you decide to move to a location with decreased property taxes. It is likely that your housing expenses will be less in retirement.
Transportation
Transportation likely represents your second most expensive expense category. Now that you are no longer commuting back and forth to work, it is likely that your transportation expenses will decrease. Fuel, maintenance, and repair costs will all likely decrease. Adjust your retirement expenses accordingly.
Food
If you are like most retirees, there will be fewer mouths to feed than while in your working years. The kids are likely out of the house and on their own. It’s likely just you and your spouse consuming the weekly groceries.
Saving for Retirement
This one may be obvious. Once retired, there is no longer a need to periodically put money away for retirement. This amount, particularly in the years leading up to retirement, may be quite significant, perhaps representing 15% of your gross income. As a result of these savings, your annual expenses will be significantly lower.
Life Insurance and Disability Insurance
During your working years, you likely carried life insurance in order to cover the costs of your mortgage and the kids college if the unthinkable occurred. As you accrued a retirement nest egg, paid off the mortgage and got the kids through school, the need for life insurance no longer exists. If you were to pass away after retiring, your nest egg would likely be enough to cover the expense of those left behind. For the same reason, disability insurance is also no longer needed in retirement. These expenses can likely be eliminated from your retirement budget.
Taxes
While you were working, you had little or no control over the taxes your paid to the government. Your taxes were determined by your gross income and the corresponding tax bracket. However, in retirement, it is likely that you will have at least some control over the taxes you pay each year. You will likely have several accounts to choose from when withdrawing money for retirement, such as brokerage accounts, tax-deferred accounts (401K’s and IRA’s) and Roth IRA’s. Each of theses account types are taxed differently. You are likely aware that withdrawal from your tax-deferred However, your brokerage accounts are taxed differently. It’s is likely that a significant portion of your brokerage account represents money that you invest, called the basis. There are no taxes paid on the withdrawal of any of the basis. Capital gains taxes, ranging from 0% to 20%, are paid only on withdrawals from the yield in this account. Withdrawals from your Roth account are, by their very nature, tax-free. By strategically withdrawing various amounts from different accounts, you can minimize your tax obligation. In addition, performing Roth conversions early in your retirement period may eliminate future taxes completely. Adjust your retirement expenses related to taxes accordingly.