Americans Are Dead Wrong If They Believe This About The Cost Of Living During Retirement
Retirement brings about many important changes in the life of an American. Typically, retirees will be in their 60s, but this isn't always a given. After all, it's entirely possible to save like a fanatic and get out of the rat race in your 30s! More commonly, early retirees will take advantage of complex but advantageous drawdown strategies to bridge the gap when retiring five to 10 years ahead of the 'typical' schedule. With the average retirement coming at 62 and full retirement age set at 67, most people will spend 40-plus years working before they hang it up and move on to greener pastures. That's more than enough time for savers who stick to a long term plan to build up significant retirement accounts to support themselves. However, saving is only half the battle.
Once you leave the workforce, budgeting in this new phase of life isn't just a matter of drawing out the funds you need to cover your living expenses. Maintaining a strict disbursement plan is crucial to providing your nest egg with the room it needs to stabilize or even continue growing. Unfortunately, one common myth about finances in this third act can spell disaster. Because a rule of thumb suggests that you need about 75% of your pre-retirement income to make ends meet here, it's frequently assumed that retirees enjoy reduced living costs once they stop working. In reality, things shift, they don't subtract, so banking on this change can really gum up the works.
Inflation tends to be considered the biggest threat to retirement security
Financial woes abound for even the most well-prepared retirees. The hard part of this pickle is that the sticky situations a retiree might find themselves in are largely out of their control. In a 2024 Nationwide survey, 90% of retirees worried about inflation as "the biggest threat to their retirement security," with cuts to Social Security and Medicare benefits following close behind (at 84% and 83% worried specifically about these issues, respectively).
Inflation is sadly a fact of life, averaging an annual cost increase essentially across the board for everything that people need of about 2% to 3%. Even with this threat to financial security well-established, it remains a hidden adversary that can tank your retirement fund if you aren't careful. Many workers get a pay bump every year, in large part to account for the annual jump in consumer pricing. This means that inflation is often a problem that only gets brought up and fixated upon when it reaches surprising levels. BLS data shows monthly inflation figures at or above 6% throughout much of 2022, for instance, and the first half rate of 5.4% in 2023 was equally hair raising for overwhelmed savers and spenders. Retirees don't have the same built-in protection that comes from raises. They have to account for a gradual and unrelenting increase in the cost of living on their own, and some sadly won't be prepared for this added burden.
Medical bills only increase with age, and plenty of discretionary categories often expand with time on your side
Price appreciation in groceries, clothing, and gadgets isn't the only thing that retirees have to account for, however. Beyond the pedestrian expenses that dominate consumer lifestyles, retirees tend to experience numerous other financial strains. For one thing, it's a fact of life that average annual medical expenses rise as you get older. Not every retiree will experience health complications or scary emergency needs, but as a trending norm, older people frequent the doctor more often, and the treatment they require is often more in depth, and therefore expensive. Cancer, as an example, becomes significantly more likely once you pass 50.
On a more upbeat note, many retirees dream of spending more time engaging in hobbies or traveling. With more leisure time at your disposal, you'll often find more advantageous options when it comes to exploring the world at off-peak prices or engaging in your favorite activities. But with more time you might also find yourself spending far more while doing the things you love in greater abundance.
Failing to account for this shift in costs can leave you burned when it comes to managing retirement finances. Certainly, the cost of commuting to the office and things like business attire expenditures melt away, but many other demands rise to take their place. In some cases, you may end up spending more on the new 'big ticket' items that claim space in your budget.