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How to Budget for Retirement

Trying to work out a budget for retirement? Start with these numbers.

The question is the one asked most often about later life: How much money do I need to save for retirement? Of course, that figure is tough to pin down unless you have a good idea about what your expenses might be after leaving the workplace – and many people don’t take the time to run the numbers.

Earlier this year, in its annual retirement confidence survey, the Employee Benefit Research Institute found that slightly more than four out of 10 workers (42%) guess at how much money they will need to accumulate for later life rather than doing a systematic retirement-needs calculation.

Yes, trying to budget for expenses in the coming months is often difficult enough – never mind five or 10 years in the future. But a recent study from EBRI can put you in the ballpark.

The report – “Expenditure Patterns of Older Americans, 2001-2009” – spells out how much different age groups spend in various categories at different points in their lives. For instance, median annual expenditures in 2009 (in 2010 dollars) for a household with at least one person age 65 to 74 totaled:

Home: $14,471

Food: $3,896

Health: $3,504

Transportation: $3,887

Clothing: $830

Entertainment: $2,417

Other: $1,185

Some important points to note:

Apples and oranges: Expenses changes before and after retirement. Before retirement (as EBRI notes), you pay FICA taxes, have work-related expenses and (ideally) save money for later life. After retirement, though, your financial obligations change. The upshot, according to the report: “Retirees may still be able to maintain their level of pre-retirement well-being with very different income levels.”

The good news: Household expenses appear to decline steadily as we age. Using expenditures at age 65 as a starting point, household spending falls 19% by age 75, 34% by age 85 and 52% by age 95.

The bad news: Spending tied to health care is the second-largest slice of the budget pie for older Americans – and the only component that increases steadily with age. Between ages 50 and 64, health-care expenses account for about 10% of household budgets; for households age 85 and older that figure doubles to about 20%.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.