Think Health Costs Are Your Biggest Retirement Worry? Think Again

Retirement is a phase of life that many look forward to, envisioning it as a period of relaxation and reduced expenses. Recent data indicates that retirement finances may be unpredictable. A study by T. Rowe Price found that while retirees’ overall spending decreases, the rate of decline varies. The primary culprit behind this inconsistency? Housing expenses.

The Volatility of Retirement Spending

The fear of outliving one’s savings is real for many retirees. This fear often leads to a general decrease in spending. However, the T. Rowe Price study found that the decline in spending is not always steady. Nondiscretionary spending, or essential expenses that cannot be avoided, often disrupts the expected downward trend in spending. For households with an annual income of less than $150,000, the volatility in spending is primarily attributed to unplanned expenses that demand immediate cash outflows. 

Among these unplanned expenses, home-related costs stand out as the most significant contributor. These expenses, which include mortgage, rent, utilities, homeowners’ insurance, home repairs, and maintenance, were five times more likely to cause spending volatility than health-related expenses. In context, housing expenses accounted for a whopping 25.1% of spending variance, while healthcare expenses only accounted for 5.1%.

Between 2016 and 2020, Americans aged 65 and older spent an average of $16,880 annually on housing-related costs, which translates to approximately $1,406.68 per month. A report by SoFi highlighted that these expenses varied considerably based on location and the type of housing. T. Rowe’s research further revealed that half of the retirees experienced a spending increase of up to 25% between the ages of 65 and 90. 

Astonishingly, over a quarter of these households saw their spending surge by 25% to 50% during their retirement years. A recent article published in September by Money magazine estimates that the average annual cost of owning a home in 2024 is $17,500, not including a mortgage payment. 

Choosing where to live can significantly affect housing costs. For instance, in Florida, the average cost of homeowners insurance is $6,000 per year, which is four times the national average of $1,700. Due to the impact of Hurricane Idalia last month, many Floridians are bracing for even higher premiums.  

Addressing the Challenge of Spending Volatility

Managing the unpredictability of retirement spending is multifaceted. On one side, there’s the need to cushion the impact of volatility resulting from nondiscretionary spending. Conversely, there’s the challenge of generating higher income and investment returns to increase available capital. While nondiscretionary spending pertains to essential costs, discretionary spending relates to planned expenses like vacations, dream purchases, or charitable donations.

Sudipto Banerjee, the author of the T. Rowe report and vice president of retirement thought leadership at the firm, emphasized the potential risks of not having enough liquid assets. If retirees lack the necessary liquid assets to cover essential spending, they might resort to premature withdrawals from their long-term investment portfolios. Such actions could jeopardize their chances of a comfortable retirement.

Banerjee’s recommendation for plan sponsors and advisers is clear: offer solutions that address liquidity and growth. By ensuring adequate allocations to liquid assets, retirees can better manage financial stress during periods of increased spending.

Rethinking Retirement Strategies

Given the unpredictable nature of expenses during retirement, a simplistic approach focusing solely on systematic withdrawals might not suffice for most retirees. Banerjee advocates for a more holistic strategy, urging plan sponsors to devise strategies for income generation and risk mitigation related to spending.

The findings underscore the importance of financial preparedness, especially concerning housing expenses, to ensure a stable and comfortable retirement.

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