The Most Unpredictable Cost You Will Face in Retirement

Many people worry about how they will cover rising health care costs in retirement. But medical services are unlikely to be your most vexing expense during your golden years.

Instead, there is another cost that will probably have a more unpredictable impact on your wallet. And it’s not even close.

Expenses related to your home are far and away the most volatile cost that retirees face — five times more likely to increase spending volatility than health care costs, according to a recent T. Rowe Price analysis.

Spending volatility refers to fluctuations in spending levels.

The global investment management firm says home-related costs account for 25.1% of the variance in spending. Health care costs are responsible for just 5.3% of such variance.

T. Rowe Price notes that although households spend an average of 2% less during retirement, such decreases in spending are “typically not uniform, with retirees experiencing meaningful ups and downs over time rather than a continuous decline.”

It’s not unusual for households to experience wild swings in spending during their golden years. T. Rowe Price found that:

• 1 in 2 retirees saw an annual spending increase of up to 25% at some point
• 1 in 4 households saw a 25% to 50% spending increase
• Around 1 in 5 households saw spending increases between 50% and 100%

For households that make less than $150,000 annually, nondiscretionary expenses — that is, necessary expenses, rather than optional ones — drive spending volatility more than any other factor. In some cases, spikes in nondiscretionary spending can last for years, T. Rowe Price says.

Understanding that home-related expenses trigger financial unpredictability can help people craft a plan to reduce such volatility before they retire, according to T. Rowe Price.

For example, workers can complete major repairs prior to stopping work. Or, they can downsize to a home that is likely to need fewer repairs.

For the analysis, T. Rowe Price looked at data from the University of Michigan’s Health and Retirement Study and its supplement, the Consumption and Activities Mail Survey.

The sample used in this T. Rowe Price study tracked a nationally representative set of 1,306 retired households over a 14-year span between 2005 and 2019.