Everyone dreams of the day they can stop working for good. But worries about finances can cloud the sunniest visions of retirement.
How will you cover daily expenses when you no longer can count on a regular paycheck?
Fortunately, some costs shrink significantly — or even disappear — once you quit the rat race. Following is a look at major expenses that will cost you less during your golden years than they did during your working years.
The daily grind can wear away at a worker’s wallet. But when you exit the workforce, much of the money you otherwise would have spent on getting to and from work will remain in your pocket.
Indeed, U.S. households overall spend an average of $9,826 a year on transportation — costs such as vehicles, gas and insurance — according to the U.S. Bureau of Labor Statistics’ latest data on annual consumer spending, which is for 2020.
However, households led by someone 65 or older spend an average of $6,221 per year on transportation.
2. Payroll taxes
A paycheck is a beautiful thing, but it is often less attractive than it appears on the surface.
FICA taxes, often referred to as simply “payroll taxes,” siphon 6.2% of an employees’ pay for Social Security and 1.45% for Medicare. That’s a total of 7.65% of your pay taken for the systems that fund those future retirement benefits.
The situation is even tougher if you are self-employed. Instead of splitting payroll taxes with your employer — 7.65% paid by you, 7.65% paid by your company — you are on the hook for the full 15.3%.
Fortunately, once your job disappears, so does your obligation to fork over payroll taxes.
3. Retirement contributions
Millions of American workers desperately pinch pennies so they can save money for retirement, often in a tax-advantaged investment account such as a 401(k) or an individual retirement account (IRA).
But once you stop earning income, you can start reaping the benefits of all those years of saving for “the future.” Instead of contributing to your retirement accounts, you will be withdrawing from them.
That means you no longer will have the “expense” of contributing as much as $20,500 to a 401(k) or $6,000 to an IRA each year. And those amounts don’t even include so-called “catch-up contributions” that those age 50 and older can make to their retirement accounts.
4. Life insurance and disability insurance
Typically, workers purchase life insurance to protect their families in the event that the worker dies and leaves dependent loved ones without income. Similarly, disability insurance is there to replace a worker’s income should he or she become ill or injured and unable to work.
But if you are retiring from work, chances are good that you plan to live off of your savings, investments and Social Security benefits. In other words, if you have enough money to retire, you probably no longer need to insure your income.
While life or disability policies can still make sense for some retirees, others can say “so long” to these forms of insurance — and their associated costs.
Housing costs — from mortgage and rent payments to insurance and maintenance — are the single biggest type of expense for the average U.S. household and the average older household. But they are lower each year for the latter.
Households led by someone who is 65 or older spend an average of $17,435 per year on housing expenses, compared with an average of $21,409 across all households, according to the Bureau of Labor Statistics.
Chances are good that your household will be smaller in retirement than it was when you were younger, with children likely having grown up and moved out. That means fewer mouths to feed, which means lower food costs.
Households headed by those 65 and older spend an average of $5,698 per year on food, including both the cost of food eaten at home and eating out. That’s compared with an average of $7,316 spent across all U.S. households.
Chances are good that in many homes, a large percentage of the clothing budget goes toward work-related attire.
When you finally retire, you can trade in those fancy suits and other attire for T-shirts and jeans. And as your wardrobe becomes more modest, your apparel costs likely will follow suit.
Bureau of Labor Statistics data shows that households led by someone 65 or older spend an average of $821 per year on apparel and related services, such as dry cleaning and alterations. That compares with an average of $1,434 per year across all households in the U.S.