Retirement

How Much Do People Actually Spend in Retirement?

By Chris Duderstadt

May 25, 2023

How Much Do People Spend in Retirement?

Key Points – How Much Do People Spend in Retirement?

  • Analyzing a Survey from the Employee Benefit Research Institute about How Much People Spend in Retirement
  • How Is Your Spending Different in Retirement Compared to Your Working Years?
  • Setting Up a Spending Plan for Retirement
  • Inflation’s Impact on People Figuring Out How Much They Can Spend in Retirement
  • 11 Minutes to Read | 22 Minutes to Listen

How Much Do People Actually Spend in Retirement?

Many people dream about all the things they can do after they stop working, but how much do people spend in retirement? In October 2022, the Employee Benefit Research Institute conducted a survey on how the pandemic impacted people’s spending in retirement. Some of the results could surprise you. Dean Barber and Bud Kasper are going to review some of the statistics from the survey to assess how much people spend in retirement on America’s Wealth Management Show.

Dean and Bud’s Main Takeaways from the Employee Benefit Research Institute’s Survey

While this survey from the Employee Benefit Research Institute highlights how the pandemic impacted how much people spend in retirement, Dean and Bud think that there’s much more to that right now than the fallout of COVID-19. The main questions that the survey addresses is, “How much do people spend in retirement?” but consider these questions as well:

Transitioning into Retirement

One of the things that happens when you head into retirement is that you lose the confidence that you had while you were working because things were crystal clear in your working years because you knew how much was coming in. You knew that your health insurance, 401(k) deposit, and taxes were coming out of your paycheck. So, you knew how much was being deposited in your checking account and how much you could spend.

“It’s not a simple math problem to figure out how much you can safely spend. That’s where a lot of people fall short. A lot of people think it is a simple math problem.” – Dean Barber

Surprising Statistics About How Much People Spend in Retirement

While figuring out how much you can safely spend isn’t something that can easily be solved, it needs to be solved. Dean and Bud are going to look at some surprising statistics from the Employee Benefit Research Institute to illustrate how to go about that.

One of the more surprising statistics that jumped out to Dean in the survey was that more than half of the people surveyed retired earlier than they expected. Why might that be? Well, there are several possible reasons.

“We know that a lot of people don’t retire on their own terms. In this survey, 29% said they could retire earlier from an affordability standpoint, but a big percentage were retiring earlier because of a health-related problem or disability not related to COVID-19. And maybe someone retires earlier because of their spouse’s or parents’ health and it forces them to leave the workforce.” – Dean Barber

Nearly 2,000 American retirees were questioned in the survey to see what all has changed since 2020 as far as spending patterns and retirement well-being go. The people surveyed were ages 62 to 75. Something Bud was curious about with the survey was if those people realized how much they needed to spend throughout retirement and not just for one year or a few more years. He didn’t seem to think so based on the results of the survey.

“I don’t believe that any of those people in this survey truly understood what goes into retirement planning. You need to understand the definitions associated with retirement planning in terms of sources of income, taxes, etc. to know whether your probability of success is good, fair, or bad.” – Bud Kasper

You Need a Financial Plan to Determine How Much You Can Spend in Retirement

Dean has spent nearly 37 years as a financial advisor and Bud has done so for 40 years. Out of all the people they’ve met with over the years, they can count on one hand how many of them have had a detailed financial plan already put together. A forward-looking, comprehensive financial plan is the key to figuring out how much you can spend in retirement and how you can get your income.

Last week on America’s Wealth Management Show, Dean and Bud talked about the many things that need to be considered in the five years before you retire. Their main point was that there is a lot of planning that needs to go into your retirement. That’s why we encourage people to start building a financial plan at least five to 10 years prior to when you want to retire.

We’ve included date-based and age-based timelines, as well as 30 yes-or-no questions to gauge your retirement readiness, in our Retirement Plan Checklist. It’s a very useful resource to use as you figure out how much you can spend in retirement. It was created with the purpose of helping people get to and through retirement. You can download your copy below.

How Much Do People Spend in Retirement

Retirement Plan Checklist

When Should You Claim Social Security?

Let’s move on to another statistic from the survey that caught Dean and Bud’s eyes. In that survey, seven in 10 people said Social Security was a major source of their in their income. After hearing that, Bud had a few more questions for those who were surveyed.

“When you extrapolate what that number would be for a couple, are you both filing at the same time? Is it wise for you to file for your Social Security benefits? Should it be postponed? And why would you postpone? The answer to that is because it can grow when you’re not utilizing it. There are so many variables associated with this. This survey really takes the attitude that people who are in retirement with what they understood they owned at the time and sources of income and asking the question, ‘Can I make it happen?’” – Bud Kasper

How Much Were the People Surveyed Spending in Retirement?

It’s not surprising that seven in 10 said Social Security was a major source of income. Here’s why. Approximately half of the people surveyed said they spend less than $2,000 each month, while one in three spend somewhere between $2,000 and $4,000 per month. Only 16% spend between $4,000 and $7,000 a month. And only 3% spend more than $7,000 each month.

If you had an individual who had maxed out their Social Security and they were going to get the highest possible amount in their full retirement age, their Social Security alone is going to be roughly $40,000 a year. Even if their spouse didn’t work, their spouse is going to get half of what their full retirement benefit is. So, you’re talking about $60,000 a year or $5,000 a month for somebody who maxed out.

“If only 3% are spending $7,000 or more per month, I can see why seven in 10 said that Social Security is a major source of income. People need to understand how Social Security works way before they go to claim.” – Dean Barber

Retirement Planning Myths

That led Dean to think about a few myths about retirement planning that he and Bud have had to debunk over the years. One of them is to follow the 4% rule. People just think they should follow the 4% rule and have a 60-40 portfolio. That’s not a plan.

Another myth that needs to be debunked is that the date that you claim Social Security is synonymous with the date that you retire. Now, that may be true and it may be a good idea for some people, but there are several ways that people can claim their Social Security.

“For a couple age 62, most will have over 600 different iterations of how they can claim their Social Security. The difference between the best and worst claiming strategy based on the same earnings history in the same life expectancy could be $100,000 or more of additional lifetime income from Social Security. You need to get that right. Don’t fall into the myth of the 4% rule or the or that you claim Social Security when you retire. That’s just simply not that’s not true.” – Dean Barber

How Much Will You Need to Spend on Housing Expenses in Retirement?

The next statistic from the survey that we want to discuss involves housing expenses. According to the survey, nearly a third of people’s monthly income goes toward housing expenses.

If possible, you should be endeavoring to eliminate your mortgage payment by the time you’re ready to retire. Creating a financial plan can help you figure out what expenses can be eliminated by your desired retirement date. And like we said, while you can claim Social Security at 62, there’s more that needs to go into your claiming decision. And the date you claim shouldn’t necessarily be synonymous with your retirement date.

“I would say at least 80%, 85% of my clients are retiring after 62 because they’re serious people. They understand that they need to evaluate all income sources and try to maximize the result to what their income goals are going to be. And that’s not just for a single year, but into the future as well. And don’t forget to incorporate an inflation factor too.” – Bud Kasper

How Much Will You Need to Spend on Health Care Expenses in Retirement?

One reason why people won’t retire prior to 65 is because they want to wait until they’re eligible for Medicare.  But there are people that don’t know that they can afford to pay for health insurance prior to being eligible for Medicare.

“They just put it off or don’t even talk to a CFP® Professional. Your retirement date is something that you need to talk about with your significant other and CFP® Professional.” – Dean Barber

Inflation’s Impact on People Figuring Out How Much They Can Spend in Retirement

The next statistic from the survey that Dean and Bud want to break down involves inflation. The number who shared that their spending is higher than they can afford increased from 2020 to 2022. It was 17% in 2020 and increased to 27% in 2022. The number one reason according to those surveyed was inflation.

“Typically, inflation doesn’t cause you to go broke, but it’ll cause you to live like you’re broke. I was surprised by the 27% that are spending more than they can afford. That tells me that at some point they’re likely to run out of money and will then be a burden on their children. And typically, when they’re going to be a burden on their children is just when their children are getting to retirement age.” – Dean Barber

The Difference Between Good Debt and Bad Debt

The fear of running out of money in retirement is a big concern for so many people. So, it’s understandable that people won’t want to go into retirement with any debt so that they feel like they’re standing on solid ground financially as they head into retirement.

There are a lot of types of debt that you don’t want to take into retirement, but as Dean and Bud recently pointed out on America’s Wealth Management Show, there are examples of good debt and bad debt. You need to have a good understanding of what debt, if any, that you’re carrying into retirement. That plays a big role into how much you’ll spend in retirement.

Circling Back to Social Security

As we begin to wrap up this discussion on how much people spend in retirement, we want to talk a little bit more about Social Security.

Let’s look at the other part of this. If you’ve had a job and you’ve paid into Social Security, your Social Security is going to be a sound source of income. But, as we mentioned earlier, the challenge of it is when to claim Social Security.

“You need to consider what your benefit would be at 62, 64, 66, etc., because obviously it’s growing exponentially if you’re not taking it out. If you’re going to retire at 62, understand what that benefit would be. Understand whether your spouse is old enough to claim the benefit along with you. And then challenge yourself to say, “What if I were to postpone this for another year or two years?” Very few people know how to do that. That’s why we’re here to help people understand the ability to manage various sources of assets to maximize the result in terms of annual income.” – Bud Kasper

An Example of Why Social Security Claiming Needs to Be Well Thought Out

Bud insight on when to claim Social Security made Dean think of a situation that he’s been involved with for one of his clients. Dean intentionally chose for his client to do a spousal application for Social Security. His wife claimed and then he claimed a spousal benefit instead of claiming his own benefit. In claiming his spousal benefit, that allowed him to collect half of his wife’s Social Security. He turned 70 this year and now gets his own benefit. His own benefit is now up to $4,000 per month. He maxes it out.

At the same time, he was diagnosed about a year and a half ago with a disease that has been tied to Agent Orange in Vietnam. So, he is also now eligible for full disability from the VA. He’s not only going to get his $4,000 a month in Social Security—which is up from about $1,200—he’s also going to get this disability benefit. That’s going to be almost another $4,000 a month.

Where Roth Conversions Can Make a Big Impact

Dean and one of our CPAs had a long conversation with the client about doing this wisely. He has a lot of money still in IRAs. We converted a substantial portion, but he’s still got about $400,000 in traditional IRAs. Dean and our CPA put together a side-by-side comparison because they knew that it’s highly unlikely that the client and his wife are going to need to spend most of the assets that they have accumulated.

“It’s going to do two things. Number one, it’s going to change the mindset of our timeline for investing that money, knowing that that money is likely now going to be for children and grandchildren. And we’re thinking about using the VA disability benefit to pay for Roth conversions over the next couple of years to get most of his money moved into Roth IRA. We’ll leave a little bit in the traditional IRA because he is a charitable inclined. We can get some of the money out of the traditional IRA by doing Qualified Charitable Distributions. That gets the money out of the IRA tax-free to get to charities. The bottom line is that all came about not just because of the VA disability, but because of the way that we claimed Social Security.” – Dean Barber

Provisional Income Limits

Bud has another planning point to add to that client’s situation. Since the husband postponed taking his Social Security and got the maximum benefit, if he were to pass, his spouse would get the higher of their two benefits (in this case, it would be the husband’s). So, it benefited the longevity of the plan for his wife.

If we can get everything into a tax-free environment over the next couple of years, if he happens to predecease her, not only is she going to get that larger disability benefit, but most of her assets will then be in Roth IRAs. That means that the income coming off the Roth IRAs is tax-free and Social Security is tax-free because they stayed below the provisional income limits.

“There are limits that would make it taxable. But if you don’t have any taxable income to report, it’s tax-free. This is financial planning.” – Bud Kasper

Building a Financial Plan to Determine Your Probability of Success in Retirement

With our closing point from the survey, we want to share that seven out of 10 retirees shared they were satisfied in retirement in 2022. That’s down from 7.4 out of 10 in 2020. Also, when they related their alignment of life in retirement to what the expectations were, it was only 6.4.

“That’s kind of like saying, ‘Yeah, it’s about what I expected,’ or ‘No, it’s not quite as good as what I expected.’ One of the main factors of people reporting that they had a lower sense of well-being in retirement was because they didn’t have a financial plan.” – Dean Barber

We want to ensure that you have a great sense of well-being in retirement. Therefore, you need to have a financial plan. There are a few ways that you can get started with creating one. First, if you didn’t earlier, make sure to download our Retirement Plan Checklist. That will help you get your ducks in a row and give you a better idea of where you’re at on the road to retirement.

Second, check out how all the components of your financial life come together by building a financial plan while using our financial planning tool. This is the same tool that our CFP® Professionals use with our clients. We’re giving you the opportunity to use it at no cost or obligation and from the comfort of your own home. Just click the “Start Planning” button below and you’ll be on your way with building a plan that’s unique to you.

How Much Do People Spend in Retirement

START PLANNING

Working with a Team of Professionals

Third, we can’t stress enough how important it is to work with a team of financial professionals that’s working for you. We briefly touched on how it’s critical to work with a CFP® Professional that’s working alongside a CPA to review your plan for tax planning opportunities. Our estate planning specialists, insurance specialists, and investment management team are also imperative to serving our clients’ financial planning needs at Modern Wealth Management.

If you want to get to the bottom of how much you can actually spend in retirement, you need to be working with a team of professionals like we have at Modern Wealth. If you have questions about the financial planning process and/or spending in retirement, you can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals by clicking here. We can meet with you in person, virtually, or by phone depending on what works best for you.

How Much Do People Actually Spend in Retirement? | Watch Guide

00:00 – Introduction
01:30 – An Eye-Opening EBRI Survey
06:36 – 7 in 10 Say Social Security is Main Income Source
08:51 – Dean & Bud DEBUNK Planning Myths
09:55 – Large Expenses: Housing & Health Care
13:16 – Retiree Spending is Going Up with Inflation
15:28 – Refocusing on Retirement Income
21:29 – What We Learned in Today’s Show

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.