What are the Commonly Overlooked Retirement Costs?

 

You have probably already calculated for major expenses during your retirement years such as housing, utilities, and groceries. But chances are you likely overlooked some important expenses. Here are 10 commonly overlooked retirement costs that you should include in your calculations to ensure you can enjoy your golden years without financial stress.

10 Commonly Overlooked Retirement Costs

1. Taxes

The first expense you need to account for is taxes. They don’t stop simply because you retired. Although both federal and state taxes drop with less income, you can’t overlook them. Without a steady salary, it becomes harder to support a large household on a fixed income. And, don’t forget you’ll have to pay taxes when you withdraw from your 401(k)s and traditional IRAs as well.

You can estimate federal income tax and state income taxes depending on where you live. Read up on local tax laws as well so you know what your state’s rate is and if there are exemptions for retirees. Many people downsize to a smaller home to save money. Others look for locations that offer better tax benefits and a lower cost of living. Choosing accounts that aren’t tax-deferred can also save you money down the line.

2. Inflation

Inflation is another cost that can eat away at your nest egg. Rising inflation rates devalue your money’s purchasing power. Additionally, it also will affect your cost of living since your dollar won’t go as far. If you haven’t already, you should account for this in your investing strategy.

Unfortunately, you can’t predict market changes or know when inflation will increase. Although inflation rates have been low in the past, they may not remain low forever.  Most financial advisors accommodate for an average rate of increase of 3%. If you haven’t accounted for this retirement cost already, discuss how to adjust your strategy with your personal financial advisor.

3. Healthcare Costs

Thanks to advances in medicine, people are living longer. However, this also comes with greater financial costs. And, premiums and deductibles tend to increase annually. Based on 2020 figures from the Bureau of Labor and Statistics, the average person over 65 spent $6,668 on health care expenses.

Although you may be in good health when you retire, you will probably develop conditions that require regular prescriptions and medical care as you get older. The bills can become very expensive, even with assistance. That means you’ll need more in your retirement accounts to cover all your unforeseen expenses.

Furthermore, health insurance rates increase after retirement. So without a pension, you may no longer receive assistance from your employer. In that case, you’ll have to rely on Medicare and Medicaid or private insurance. Unfortunately, some expenses such as long-term and dental care aren’t covered by Medicare. You can purchase the supplemental health insurance plan from Medicare, also known as the Medigap policy for out-of-pocket expenses. However, it is still an additional cost. You can also look at an HSA to assist with medical expenses and still get the tax advantages like other retirement accounts.

4. Long-Term Care

In addition to your regular health care costs, there will also be long-term care costs. Depending on where you live and the type of facility you choose, nursing homes and long-term care facilities range from $1,603 to $8,821 each month. And, Medicaid only covers these expenses for people with low income. This means you’ll have to purchase long-term care insurance policies or cover the cost yourself. If you don’t plan ahead, you could find yourself with limited options and substandard care.

5. Home Maintenance

You should also think about the expensive updates and repairs that come with time and age. While these costs are included with the general responsibilities of owning a home, you never know when a pipe will break, storms will damage your roof, or you’ll need to replace your appliances. And, you’ll also have to pay a professional to take care of your yard work as you lose mobility. Lawn care maintenance, snow removal, and HOA fees quickly add up.

However, you may also need to pay for other renovations if you plan to stay in your home. For example, you could face costly expenses to widen doorways to accommodate a wheelchair or set up a bedroom on the main floor. The specialized furniture or equipment to assist in the bedroom, the bathroom, and in multi-story homes isn’t cheap either. If you are facing these bills, you may consider downsizing if it takes up too much of your budget.

6. Transportation

Even without the daily commute, you still need transportation. Whether to get to medical appointments or just to visit family and friends, you need to get around. If you drive yourself, you’ll have other costs besides car insurance and gas. At some point, you’ll have car repairs or upgrade to a more reliable vehicle. Many retirees who don’t drive rely on private services which can also become expensive.

7. Hobbies and Travel

After you retire, you finally have the time to do all the things you enjoy. But the expense of these activities is one of the most commonly overlooked retirement costs. Even with discounts, it can get pricey. The associated costs for things you buy for new hobbies, ticket prices, and eating out are significant. The average entertainment costs for someone over 65 before the pandemic was $2,381. Although it is much lower now, it’s still a huge chunk of your budget. Keep track of your monthly expenses and make adjustments as necessary.

8. Family Support

Another unexpected cost to account for is financial support for your family. If you have a child or loved one who is experiencing financial difficulties, education costs, or unexpected emergencies, most of us will help out if we have the resources. But, you probably didn’t account for supporting anyone else in your retirement budget. If it becomes too much, you may have to learn how to tell them no and let them deal with the situation on their own.

9. Retiring Early

If you have the opportunity to retire early, you’ll need to review your retirement plan. There are many additional expenses for early retirement, whether it is by choice or not. Besides the lost income, you’ll also pay more for increased healthcare costs and living expenses. Since you can’t claim Medicare until 65, you may have to purchase private insurance until you qualify. If you aren’t ready to retire before 65, many people look for part-time jobs or passive income to bridge the gap.

10. New Debt

While you should avoid taking on new debt at all costs, sometimes it is necessary. You could need loans to cover unplanned expenses and emergencies. However, a mortgage or car payment could undo years of savings. Debt can quickly drain your retirement costs and undermine all your retirement planning.

Planning for Retirement Costs

When planning for retirement, speak with your financial advisor about the commonly overlooked retirement costs. And, consider what kind of lifestyle you can afford. Also, look at places that offer tax breaks to retirees or offer a lower cost of living to make your money go further.

If you are worried, do a trial run to see if you can live on your retirement budget. For those who find it too tight, you’ll need to finds ways to supplement your income. Covering your bills is the last you want is to worry about in retirement. However, with a little planning you can ensure a comfortable lifestyle throughout your golden years.

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