Average Retirement Spending For Couples

Understanding how much the average retired couple lives on is a crucial first step in planning your own golden years. It’s not just about knowing a number; it’s about aligning that number with your lifestyle goals and ensuring you have the financial runway to enjoy them. This guide will help you assess your needs, understand common spending patterns, and build a solid retirement financial plan.

Quick answer

• The average retired couple’s spending varies significantly, but many aim for 70-80% of their pre-retirement income to maintain a similar lifestyle.
• Key expenses in retirement include housing, healthcare, food, transportation, and leisure activities.
• Social Security and pensions are common income sources, but personal savings and investments are vital to cover the gap.
• Inflation is a major factor; your retirement savings need to grow to keep pace with rising costs.
• Healthcare costs tend to increase with age and are a significant portion of retirement budgets.
• A detailed personal budget, considering your unique circumstances, is more important than relying solely on averages.

What to check first (before you invest)

Before you start thinking about specific investment vehicles or market performance, it’s essential to lay a strong foundation for your retirement planning. These fundamental checks will guide your entire strategy.

Time Horizon

Your time horizon is the length of time you have until you need to access your retirement funds. This is typically measured in years.

• What to check: How many years do you have until you plan to retire? How long do you anticipate your retirement will last? Consider life expectancy averages, but also your family history.
• What “good” looks like: Having a clear understanding of your retirement date and a reasonable estimate of your retirement duration allows for more accurate planning. For example, someone retiring in 10 years has a different investment strategy than someone retiring in 30 years.
• Common mistake: Underestimating how long retirement might last. Many people live longer than they anticipate, meaning their savings need to stretch further. It’s better to plan for a longer retirement than to run out of money.

Risk Tolerance

Risk tolerance refers to your comfort level with potential fluctuations in the value of your investments. It’s a personal assessment of how much volatility you can handle emotionally and financially.

• What to check: How would you react if your investments lost a significant portion of their value in a short period? Are you comfortable with potential short-term losses for the possibility of higher long-term gains, or do you prioritize preserving your capital above all else?
• What “good” looks like: Aligning your investment strategy with your risk tolerance. Younger individuals with a longer time horizon might tolerate more risk for growth potential, while those closer to or in retirement might shift towards more conservative investments.
• Common mistake: Taking on too much risk when you’re close to retirement, or being too conservative and missing out on potential growth that could sustain your retirement.

Emergency Fund

An emergency fund is a readily accessible pool of money set aside to cover unexpected expenses without derailing your long-term financial goals.

• What to check: Do you have a dedicated savings account for emergencies? How many months of essential living expenses does it cover?
• What “good” looks like: Having 3-6 months (or more, depending on your situation) of essential living expenses in an easily accessible savings account. This fund acts as a buffer against job loss, medical emergencies, or unexpected home repairs.
• Common mistake: Not having an emergency fund, or using retirement savings for unexpected expenses. This can trigger penalties and taxes, and set back your retirement progress significantly.

Fees and Tax Impact

The costs associated with your investments and how they are taxed can significantly impact your overall returns.

• What to check: What are the expense ratios on your mutual funds or ETFs? Are there advisory fees? What are the tax implications of different account types and investment strategies?
• What “good” looks like: Minimizing investment fees where possible and understanding the tax advantages of different retirement accounts. For example, contributing to tax-advantaged accounts like 401(k)s and IRAs can reduce your current tax burden or allow for tax-free growth.
• Common mistake: Overlooking fees, which can erode returns over time, or not understanding the tax implications of withdrawals in retirement, leading to unexpected tax bills.

Account Type (401(k), IRA, Brokerage)

The type of account you use for saving and investing has different rules, contribution limits, and tax treatments.

• What to check: Are you maximizing contributions to employer-sponsored plans like 401(k)s or 403(b)s, especially if there’s an employer match? Are you utilizing Individual Retirement Arrangements (IRAs), such as Traditional or Roth IRAs? Do you have taxable brokerage accounts?
• What “good” looks like: Using a combination of account types strategically. Employer-sponsored plans often offer a match, which is essentially free money. IRAs provide tax advantages, and taxable accounts offer flexibility.
• Common mistake: Not taking advantage of employer matches, or not understanding the differences between Traditional and Roth accounts, which can lead to less optimal tax outcomes in retirement.

Step-by-step (simple workflow)

This workflow outlines a practical approach to understanding and planning for your retirement spending needs.

Step 1: Track Your Current Spending

• What to do: For at least one month, meticulously track every dollar you and your spouse spend. Use budgeting apps, spreadsheets, or a notebook. Categorize expenses (housing, food, utilities, transportation, healthcare, entertainment, etc.).
• What “good” looks like: A clear, detailed record of your household’s monthly expenditures, showing where your money is going.
• Common mistake: Underestimating or forgetting small, recurring expenses. These can add up significantly over time. Be thorough and include everything.

Step 2: Estimate Retirement Spending Needs

• What to do: Analyze your current spending and project how it might change in retirement. Some expenses may decrease (e.g., work-related costs, mortgage payments if paid off), while others may increase (e.g., healthcare, travel, hobbies). A common rule of thumb is to aim for 70-80% of your pre-retirement income, but adjust this based on your lifestyle plans.
• What “good” looks like: A realistic projected annual retirement budget that reflects your desired lifestyle, considering potential changes in expenses.
• Common mistake: Assuming all expenses will drastically decrease. Healthcare costs often rise, and many retirees find they have more time and desire for leisure activities, which can be costly.

Step 3: Identify Income Sources

• What to do: List all potential income streams in retirement. This includes Social Security benefits (estimate yours on the Social Security Administration website), pensions, annuities, rental income, and any part-time work.
• What “good” looks like: A comprehensive list of all expected retirement income, with realistic estimates for each source.
• Common mistake: Overestimating Social Security benefits or relying too heavily on a single income source. It’s wise to have multiple income streams if possible.

Step 4: Calculate the Savings Gap

• What to do: Subtract your total estimated annual retirement income from your total estimated annual retirement spending. This difference is the amount your savings and investments will need to generate each year.
• What “good” looks like: A clear number representing the annual shortfall your investment portfolio needs to cover.
• Common mistake: Not accounting for inflation, which will erode the purchasing power of your savings over time.

Step 5: Determine Your Total Savings Goal

• What to do: Use a retirement calculator or a financial advisor to estimate the total nest egg required to generate the annual income needed to cover your savings gap. A common guideline is the “4% rule,” which suggests you can withdraw about 4% of your portfolio annually. Divide your annual gap by 0.04 to get a rough total savings target.
• What “good” looks like: A concrete savings target that provides a clear goal for your investment efforts.
• Common mistake: Using an overly aggressive withdrawal rate (e.g., more than 4%) which increases the risk of running out of money.

Step 6: Review Your Current Savings and Investments

• What to do: Tally up all your retirement accounts (401(k)s, IRAs, taxable brokerage accounts, etc.) and other investment assets.
• What “good” looks like: An accurate picture of your current net worth and investment assets dedicated to retirement.
• Common mistake: Forgetting about smaller accounts or not consolidating where appropriate, making it hard to track progress.

Step 7: Assess Your Progress

• What to do: Compare your current savings to your total savings goal. Are you on track?
• What “good” looks like: Understanding how far you’ve come and how much further you need to go to reach your goal.
• Common mistake: Not regularly reviewing progress, leading to a rude awakening later in life.

Step 8: Adjust Your Savings Strategy

• What to do: Based on your progress, adjust your contribution amounts, investment allocation, or retirement timeline. If you’re behind, consider saving more aggressively, working longer, or adjusting your retirement lifestyle expectations.
• What “good” looks like: A concrete plan to bridge any savings gap, whether through increased contributions, optimizing investments, or modifying your retirement vision.
• Common mistake: Sticking to a failing plan. Be flexible and willing to make changes as needed.

Step 9: Consider Healthcare Costs

• What to do: Research Medicare costs and supplemental insurance options. Factor in potential long-term care needs. Healthcare is often one of the largest and most unpredictable retirement expenses.
• What “good” looks like: A realistic estimate of healthcare expenses in retirement, including premiums, deductibles, and potential out-of-pocket costs.
• Common mistake: Underestimating healthcare costs. These expenses can escalate rapidly and significantly impact your budget.

Step 10: Factor in Inflation

• What to do: Ensure your retirement plan accounts for inflation. This means your investments need to grow at a rate that outpaces inflation to maintain purchasing power. When projecting savings needs, use an inflation-adjusted figure.
• What “good” looks like: Your retirement plan assumes a reasonable annual inflation rate (e.g., 2-3%) and your investment strategy aims to outpace it.
• Common mistake: Planning with today’s dollars without adjusting for the fact that costs will be higher in the future due to inflation.

Risk and Diversification (plain language)

Understanding investment risk and how diversification helps manage it is fundamental to building a resilient retirement portfolio.

• What is Risk? Risk in investing means the possibility that your investment’s actual return will be different from its expected return. This includes the chance of losing some or all of your original investment. For example, investing all your money in a single company’s stock carries high risk because its success is tied to that one company’s fortunes.
• What is Diversification? Diversification is like not putting all your eggs in one basket. It means spreading your investments across different types of assets (stocks, bonds, real estate), industries, and geographic regions. The goal is to reduce overall risk. If one investment performs poorly, others may perform well, balancing out your portfolio.
• Example: Stocks vs. Bonds: Stocks (ownership in companies) generally offer higher potential returns but also come with higher risk. Bonds (loans to governments or corporations) are typically less risky but offer lower returns. A mix of both can provide growth potential with some stability.
• Example: Different Industries: Investing in technology stocks is different from investing in utility stocks. If the tech sector faces a downturn, your utility stocks might remain stable, helping to cushion the blow.
• Example: Geographic Diversification: Investing in U.S. companies is one thing, but also investing in international companies can provide exposure to different economic cycles and growth opportunities.
• The “Don’t Put All Your Eggs in One Basket” Principle: This is the core idea of diversification. If you only own stock in one company, and that company goes bankrupt, you could lose everything. If you own stock in 20 different companies across various sectors, the failure of one company will have a much smaller impact on your overall wealth.
• Asset Allocation: This is the process of deciding how to divide your investment portfolio among different asset classes (stocks, bonds, cash, etc.). Your asset allocation should align with your time horizon and risk tolerance. Younger investors might have a higher allocation to stocks, while those closer to retirement might shift more towards bonds.
• Correlation: Investments that are not perfectly correlated tend to move independently of each other. Diversification works best when you combine assets that don’t always move in the same direction. For instance, when stocks are down, bonds might be up, or vice versa.
• Rebalancing: Over time, due to market performance, your asset allocation can drift. Rebalancing means selling some of the assets that have grown significantly and buying more of the assets that have lagged to bring your portfolio back to your target allocation. This helps maintain your desired risk level.

What to do during market drops: During market downturns, it’s natural to feel anxious. However, for long-term investors, these periods can present opportunities. Avoid panic selling, which locks in losses. If your asset allocation has drifted significantly, consider rebalancing. For younger investors, market drops can be a chance to buy assets at lower prices. For those nearing retirement, a well-diversified portfolio and a conservative asset allocation are crucial to protect against significant losses.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes