America’s spending has spiked 25% — putting retirees at risk of this 1 ‘spending shock.' Here’s how much emergency savings it calls for and why your ‘retirement readiness’ depends on it

Why your retirement costs might be higher than expected

Not only might your bills generally be higher than expected during retirement, but your spending might fluctuate more than you'd think, making it harder to stay on budget.

The J.P. Morgan survey found that even though spending tends to decrease starting at midlife, there’s a lot of variation in year-to-year spending among retirees. In fact, spending tends to fluctuate more than 20% per year for the majority of retirees.

Compared to the year before entering retirement, 60% of new retirees experience spending volatility in their first three years post-career. But this trend persists, with 52% of retirees between ages 75 and 80 experiencing spending volatility from one year to the next.

A big reason for this is that retirees tend to encounter more spending shocks in larger amounts than workers due to unpredictable costs like health care, the study pointed out.

Retirees face a number of uncertainties related to Medicare. Part B premiums tend to rise from year to year, and plan-specific changes to Part D coverage can easily leave retirees paying more.

The survey puts annual retirement health care expenses in 2025 at $6,856 per person. But it's suggested that retirees budget for an annual health care inflation rate of 6% to account for rising costs.

The problem, of course, is that retirees’ portfolios aren’t necessarily generating a 6% annual return. So that extra money needs to come from retirement income.

Another issue is that retirees tend to have higher costs in certain key categories earlier in life — namely, travel, entertainment and transportation. This makes sense, since retirees are more likely to take trips and go out and do things when they're a bit younger and have better health and mobility.

But that trend can lead to fluctuating costs and put a strain on retirees’ nest eggs.

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How to prepare for a volatile retirement

It's a good idea to try to estimate your yearly retirement costs before your career comes to an end. But it's also a good idea to assume that your retirement will cost more than anticipated — and to plan accordingly.

One way to avoid scrambling later in life is to amass emergency savings for retirement.

Emergency savings are essential for households of all ages. But in retirement, it's important to have extra cash set aside for unexpected costs you can't simply cover by picking up an overtime shift.

While working part-time in retirement may be feasible during the earlier stages, it becomes increasingly harder to hold down a job as you get older.

So, it’s important to have emergency savings for the latter stage of retirement in particular.

While the report recommends retirees set aside three to six months of income, a good rule of thumb is to try to keep one to two years’ worth of living costs in cash. This also buys you protection in the event of a market downturn, giving you the option to leave your portfolio alone for a period of time if needed.

It's also important to set yourself up with a portfolio that generates steady income. Of course, you’ll need to limit your risk in your portfolio given that you may be tapping it regularly. But focus on assets that pay you on a predictable basis, like bonds and dividend stocks.

You may also want to consider buying an annuity ahead of retirement for the guaranteed income it could produce.

LIMRA research finds that half of today's retirees have access to pension income, and 72% of retirees today get enough income from lifetime-guaranteed income sources to cover their basic living expenses.

However, only 47% of working Americans ages 50 to 75 believe they'll be able to cover their basic living expenses in retirement with guaranteed income. So an annuity could help bridge that gap.

Another way to set yourself up for more financial stability in retirement — and to avoid stressing out over higher-than-expected costs — is to delay your Social Security claim past full retirement age.

For each year you do, up until you turn 70, your annual benefits get an 8% boost. That’s extra cash that may come through when you need it most.