How Does Americans Spend Their Money After They Retire?

Money After They Retire

Retirement is the most awaited phase for most Americans so that they can take the workload off their shoulders and enjoy the next phase of life.  Most of us plan a lot before retirement especially, how to deal with finances and make the best use of the limited source of income available. You would be planning to reduce your expenses after you retire and spend every penny wisely. But that’s not the case most of the time the reverse only happens at least in the initial phase.

Let’s see how most Americans are spending their money after retirement.

Most Americans are spending more after Retirement:

A recent survey shows that “Americans are spending more after retirement.”

An analysis was made by the economists at the ICI (Investment Company Institute) and IRS (Internal Revenue Service) based on the tax data to evaluate the spending habits post-retirement.  After claiming social security benefits, taking in account the spending analysis for first three months of retirement spending rose for more than half of the taxpayers. The report also claimed that “nearly 90% of the people hold or have income from employer retirement plans, IRAs or annuities.”

The analysis focused on people with different income slabs and the outcome is shown below:

  • People with lower income

The survey showed that people with lower income were spending more than they were before retirement.

  • People with mediocre income

The people with mediocre income spent almost the same what they were before retirement.

  • People with higher income

But it was different in the case of people with higher incomes. They were expected to spend more than those with lower incomes keeping their salary slabs on the check. Instead, they were spending less post-retirement which is shown in the survey report.

Important Components of the survey report:

The survey report was not made based on actual spending; instead, it was made by analyzing the income left with an individual after taxes.

What was included in the survey?

  • Social security benefits
  • Salary and wages
  • Distributions from retirement accounts such as IRA, 401(k) etc.
  • Distributions from pensions

In addition, the researchers at the ICI wrote:

“For many individuals, retirement appears to be a multi-year transition rather than an action taken at a discrete point in time.”

Based on the reports, it was evident that even 3 years after claiming social security nearly 50% of the people were still working. After analyzing this the researchers also stated that “this doesn’t mean that spending won’t slow later in retirement.”

How can things change?

The report was made keeping in mind the people who claimed their social security benefits at the age of 62. If you plan on early or 30 years later retirement then things can change when you start tracking your spending habits.

  • Retirement phase is 30 years or longer: Your spending habits will fluctuate in the tenure. You might be spending more initially then once you start analyzing where you’re spending more, you can cut on those edges.
  • Focus on a target amount: It can essentially make a difference if you have focused on your target. But saving for your retirement is a moving target and it can be sometimes a bit stressful to chase such a target. Add a category in your savings to save for retirement.
  • Expectation Vs Reality: most of us expect to spend less after they retire as they don’t have to save for retirement anymore and your tax bill is likely to drop as well. You can expect your transportation costs to fall as you won’t be commuting to work anymore. You can also expect to have cleared off your mortgages as well. But in reality, the picture is different from what you think.
  • The relationship between money and hobbies: Retirement is the phase where people give more preference to their hobbies as they have enough leisure time. At the beginning of the retirement phase, most people spend money either on travel or on leisure activities.

How much you need to save for your retirement?

A much difficult task is to decide how much you need to save for your retirement. Let’s work on a figure to save so that you’ve got a target to save for.

Let’s work on a thumb rule for how much you need to save for your retirement:  Save enough to spend about 70% of your pre-retirement income in your retirement.

Summing up:

Your spending habits can guide you on how to work with your finances. It’s time to analyze how wisely you’re spending your hard-earned income. Choose the weak areas where you can cut down on unwanted expenses and plan to save for your retirement in a much-organized way. You can make your retirement phase a more relaxed and stress-free phase by taking a few essential steps mentioned above and with planning ahead.

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