Surprise! You'll Spend More When You Retire

Why it’s a myth that your cost of living goes down after your 50s

If you follow the conventional advice from so-called financial experts, you’re going all in on your 401(k), hoping to save enough money to allow you retire on a modest income after years of hard work.

We’ve spilled a lot of ink in books and on this website talking about how awful 401(k)s (and plans like them around the world) are for retirement. Besides the fact that you have no control over 401(k)s, your match isn’t a gain, and the high fees eat away at your meager earnings (if you have them), there is one assumption when it comes to 401(k) investing that is fundamentally flawed.

That assumption is that you’ll have a lower cost of living when you’re retired than when you were working.

Living poorer?

The general logic is that because you have things like your mortgage paid off, travel less, buy less, and live a less active lifestyle, you’ll spend less when you’re retired.

To me, that sounds like a recipe for living poorer. While this might have been true when life expectancy was lower and people weren’t living as healthy lifestyles as they are now, it’s no longer true that once you retire you’re on the slow downhill slide.

I’m in my sixties and I still travel around the world, work out regularly, and love to live life to the fullest. I couldn’t imagine retiring into oblivion, sitting in an easy chair and watching television until I fall asleep during the six o’clock news. To me, that’s living a poor life. And doctors agree. Those who are active later in life live longer than those who aren’t.

You’ll, in fact, spend more

Turns out the logic that you’ll spend less in retirement is flawed. According to a new report that studied tax data, “The median taxpayer's spendable income at three years after claiming Social Security was 103% of their income from one year before collecting, the report said. It followed individuals from 1999 to 2010.”

The conclusion of this report is that most people end up spending more when they retire—at least at the beginning.

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

This speaks to what is true in all of us, once we are used to one standard of living, it is very difficult to go back down to a previous standard of living. Nor should we have to. That is why I’ve always considered conventional retirement advice to be poor-person advice.

Higher costs

The report does hedge on its findings, however, saying that the trend of spending more in the first years of retirement doesn’t mean that you won’t spend less later.

But I’ve written and talked about this for years, and the numbers don’t add up. In reality, you’ll spend as much or more money after age 50 than you did leading up to 50.

According to an article on MarketWatch, “Living to 100? That Will Be $3.5M,” the average money spent by age 50 is $1.5 million and the average spent between 50 to 81—the average life expectancy —is $1.4 million. Plan on living to 100? That will cost an additional $630,000, for a total of $2.3 million in the last half of your life. That’s nearly a million more than the first 50 years. Life isn’t less expensive in retirement, even if you’re trying to live frugally. It’s more expensive.

Why would life get more expensive even as your costs are expected to go down? Because you don’t take into account future costs that you aren’t experiencing today.

As MarketWatch reports, starting in your 70s, your healthcare costs will rise 30% on average, reaching $48,400 (with $8,100 in prescription costs on top of that). If you make it to 80, your health insurance costs end up being 57% higher, and in your 90s you might need assisted living, which comes in at a whopping $89,000.

The long and the short of it is that the older you get, you don’t spend less, you just spend different. The fun goes down and the healthcare goes up.

Most Americans can’t retire

This is bad news for the majority of Americans who don’t have enough money to retire even with a lower quality of life in the golden years.

“The median family of retirement age has $12,000 in savings. That is a terrifying figure for a country where Social Security, the state pension, pays out a maximum of roughly $2,500 a month, and pensions for both public and private employees are underfunded,” writes The Economist.

If that’s not enough to frighten you, check out these stats from a survey of 1,007 Americans by GoBankingRates:

• 49% of Americans are currently living paycheck to paycheck
• 61% do not have enough money saved to cover six months of living expenses
• 64% do not have multiple streams of income
• 68% say their investment strategy does not account for a recession

America is facing a retirement crisis. It is a ticking time bomb and most people have their heads in the sand. The conventional advice on retirement is wrong, not helpful, and gives a false sense of security. It’s time to face the reality that life will only get more expensive, and the only way to thrive during your retirement years is to think differently about money.

Retire rich with financial education

As more and more boomers reach retirement, there will increasingly be two kinds of people, the poor and the rich. Those with a poor financial education will be poor and those who are financially intelligent will be rich.

Very simply, those who understand the importance of investing for cash flow in assets that hedge against inflation will prosper while those who take the easy route of throwing money in a 401(k) will face poverty as the costs of retirement far outpace their meager earnings and savings.

Today is the day to start and improve your financial education.

Are you ready for retirement? If not, what have you been doing wrong? How will you begin to fix your path to retirement so that you can live active, live fully, and be rich in the last half of your life?