It’s an obvious truth: Retirement changes your life. You are no longer obligated to fulfill the duties of regular employment. Other changes reveal themselves in more subtle ways, both positive and negative. You are more prone to experience health challenges. You have more free time to develop your hobbies, to do more (or less) household chores, and to discover more opportunities for recreation or charitable pursuits.
You may look forward to retirement with excitement. Or trepidation. The future can be rosy or bleak, depending on how well you planned financially for retirement.
Let’s explore the changes:
1. You exchange regular paychecks for other retirement income.
Social Security tops the list of income sources for retirees. Nearly 63 million people receive Social Security benefits.[i] The average monthly benefit for retired workers is $1,413.[ii] Nearly 90% of people 65 and older receive benefits, which represents about a third of their incomes.
On the other side of the ledger, financial experts project average retirement expenditures:[iii]
• Housing: $1,322. That figure includes mortgage, property taxes, insurance, and other costs.
• Transportation: $567. That includes gas, insurance, and maintenance.
• Health care: $499. This cost may rise over the years, at least until the age of 75 when it drops by about $30 a year. Medicare picks up the largest portion of total medical expenses in retirement.
• Food: $483. Food costs generally drop by 20% in retirement.
• Personal insurance: $237. If members in your household remain gainfully employed (at least part time), they’ll still have to pay taxes for Social Security and other employment-related expenses.
• Charity contributions: $202. Retirees are generally more generous than younger people.
• Entertainment: $197. Some things never change. Retirees spend about as much on entertainment as their children and grandchildren.
Planning for retirement and seeking advice from a financial professional are critical to your pursuit of a comfortable retirement.
2. Your health-care costs go up.
Part of retirement planning involves estimating your life expectancy.[iv] If you retire at 65, your chances of living, on average, another 10 years is 76%; another 20 years, 38%; or 30 years, 5%. At a retirement age of 70, your life expectancy in retirement declines: another 10 years, 65%; 20 years, 20%; or 30 years, 1%. The average overall retirement length is 18 years.
Nearly a quarter of health-care costs are for prescription drug expenses, which includes co-pays and other expenses not covered by Medicare Part D.[vi]
Analysts estimate couples retiring today will need $280,000 to cover health-care and medical costs.[vii]
3. You must withdraw money from your retirement savings.
Once you retire, you can begin making withdrawals from your retirement savings accounts. Certain accounts have a required minimum distribution (RMD) which is the minimum amount you must withdraw from those accounts each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½.[viii]
The Securities and Exchange Commission provides withdrawal calculators to help you better plan your retirement account distribution.[ix]