The Real Cost of Retirement: Are You Saving Enough?

January 16, 2023

Social Security benefits in 2023 will see the highest increase in 40 years, but will it be enough to cover the real cost of retirement?

In 2023, there will be an 8.7% increase for COLA (Cost-of-Living Adjustment), up from the 5.9% adjustment in 2022.¹

This amounts to a $146 increase in monthly Social Security benefits for the average retired worker (the monthly benefit check will increase from $1,681 to $1,827). For the average couple receiving Social Security benefits, it will rise to $238 (the monthly benefit check will increase from $2,734 to $2,972).

While this is a significant increase, it is still not enough to cover the cost of retirement. Not even close.

The cost of retirement continues to increase, especially with inflation and rising medical costs.

Experts suggest the cost of retirement is 80% of your pre-retirement income.

Let’s say you and your spouse bring in $120,000 annual income. If you plan to follow the 80% rule, you should plan on bringing in $96,000 annual income. Broken down, this equates to $8,000 a month.

$8,000 a month is significantly more than the $2,972 you can anticipate receiving from Social Security. Where will that extra $5,000 come from to support the cost of retirement?

This is just one example.

The issue is that most Americans have a disconnect between what they think they will need during their retirement years and the actual cost of retirement.

It comes down to factoring in the following:

Your retirement age
Your health
Your lifestyle expectations

On top of these personal determining factors, you also must consider the costs of medical care, transportation, housing, food, and long-term care.

To give you a better idea of the cost of retirement, we’re breaking down those factors for you.

Medical Costs

cost of retirement

Many people mistakenly believe medical costs will be covered by Medicare.

While Medicare does help with medical costs, it does not cover everything.

For example, it is up to the individual to cover supplemental coverage and out-of-pocket expenses.

Depending on the Medicare plan you choose, you may be on the hook for paying for prescription drugs, co-payments, and deductibles.

Additionally, Medicare doesn’t cover other overlooked retirement expenses, including dental, vision, or hearing aids.

The problem is that, even if you enter retirement healthy, it doesn’t mean you will stay healthy throughout your retirement years.

Medical issues tend to occur more often as we grow older, which is why it is important to factor medical costs into the cost of retirement.

“According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”²

Transportation Expenses

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Transportation costs typically go down during retirement years.

According to Kiplinger, “The average working household spent $9,761 each year on transportation. That number drops to $6,814 for the average retired household.”³

This equates to $568 a month in transportation expenses.

However, as the last year has shown, transportation costs (i.e., gas) can rise suddenly.

When considering the cost of retirement, factor in the following transportation expenses: vehicles, gas, insurance, maintenance, rentals, and public transportation.

Housing Costs

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A report recently found “46% of homeowners between the ages of 65-79 (and one in every four people aged 80+) are still paying off a mortgage.

According to an American Financing survey, many respondents believe they may never pay off their mortgage.”⁴

Even if you enter retirement without a home mortgage, you will still need to factor in housing costs.

You may need to pay for housing upgrades, lawn maintenance, and/or repairs.

As you get older, you may be unable to do these yourself and may need to hire outside help (another cost).

You also need to factor in utilities.

Even if your house is paid off, you will still get a water bill, power bill, gas bill, etc. And don’t forget the cost of property taxes and insurance.

Statistics suggest, “The average retiree household pays an average of $17,454 per year ($1,455 per month) on housing costs. […] Comparatively speaking, the average U.S. household spends $20,091 annually ($1,674 per month) on housing.”⁵

Food Expenses

cost of retirement

Reports suggest, “Retiree households spend an average of $6,137 ($511 a month) on food, compared to $7,923 annually ($660 monthly) for the average U.S. household.”⁶

However, these numbers are a 2022 report, with totals from 2021.

Given inflation, those numbers will be significantly higher for 2022 and beyond.

For example, a dozen eggs had an average selling price of $7.37 in California at the beginning of 2023 compared to $2.35 a year ago.⁷

Long-Term Care Expenses

cost of retirement

It’s tough to think about long-term care, but it is a big factor in the cost of retirement.

The U.S. Department of Health and Human Services estimates, “Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years.”⁸

And it isn’t cheap.

Unless you plan on passing on the burden of long-term care to your children, you should factor in these costs.

Genworth, a long-term care insurer, recently published the Cost of Care Survey for 2021.⁹

These figures from the report show why long-term care may significantly impact the cost of retirement:

A private room in a nursing home in 2021 averages $108,405 annually.
An assisted living facility in 2021 averages $54,000 annually.
A home care health aid in 2021 averages $61,776 annually.

These rates have increased significantly since 2021. Keep the rising costs in mind when determining how much you may need for long-term care.

The Big Takeaway: Save Like Your Future Depends on It

cost of retirement

Take the numbers above and compare them to what your monthly Social Security benefits check should look like.

Will it be enough? The answer is probably not.

So, how will you cover the additional costs? The answer: from personal retirement savings.

Here are some ways to boost your retirement savings to ensure you have enough money in retirement:

#1 Increase Saving In 401(k) or Workplace Retirement Account

cost of retirement

Every little bit helps! Even a 1% increase in your 401(k) monthly contribution makes a difference.

If you make $50,000 a year and receive a monthly paycheck, saving an additional 1% of your salary would mean $41.66 per month goes to your 401(k). Between April and December, this extra 1% will add up to $374.94 saved.

Can you stretch it even more – to 3%? Using the example above, if you are paid monthly, and you make $50,000 a year, saving 3% would put an additional $125 a month into your 401(k). Between April and December, the additional 3% saved would add up to $1,125.

#2 Take Advantage of Catch-Up Contributions If over Age 50

cost of retirement

If you are age 50 or older, you can take advantage of catch-up contributions, which are significantly higher in 2023 than in years past.

401(k)s

Employees with 401(k)s, 403(b)s, most 457 plans, and federal Thrift Savings Plans can contribute up to $22,500 in 2023, an increase of $2,000 over 2022.

For those age 50 and older, the 401(k) catch-up contribution jumps from $6,500 to $7,500 in 2023 – for a total of $30,000.

IRAs

Individual retirement account contribution limits increase to $6,500 in 2023, up from $6,000. This applies to Roth IRAs as well. The catch-up contribution for people aged 50 and over remains the same additional $1,000.

#3 Avoid Tapping into Your 401(k)

cost of retirement

Even if you have some time before you retire, do whatever you can to avoid pulling funds from your 401(k).

Whether you withdraw or take a 401(k) loan, your future will be penalized.

Both have consequences for your financial future – mainly preventing your retirement savings from growing tax-deferred.

#4 Get Company Match No Matter What

cost of retirement

A great way to deal with the rising cost of retirement is to make sure you are contributing enough to get your 401(k) company match.

Many employers match a percentage of employee contributions, up to a certain portion of the total salary. However, some match employee contributions up to a certain dollar amount.

[See More: 4 Ways to Potentially Maximize Your 401(k) Company Match]

#5 Stay Engaged With Your 401(k)

cost of retirement