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Major Expenses In Retirement and How They Affect Retirement Planning

Last Updated:  November 2, 2019

Do you know what the major expenses in retirement are and how you are going to pay for them? 

Some of the largest expenses are shared across many of life’s stages. Things like housing, transportation, and dependent family members like children or sick parents often carry a hefty price tag.

The good news is that you can plan ahead for retirement, looking to maximize investments and optimize income while minimizing monthly expenses and taxes.

Start planning now by thinking about different scenarios so that you can make a budget and create a rock-solid financial plan. Your “retired self” will thank you for your continued savings and meticulous planning. 

The following expenses don’t represent all of the expenses to plan for, just the ones that have a bigger impact on your wallet. 

There are several major expenses in retirement you need to plan well in advance for!

1. Housing expenses in retirement

Housing costs in retirement can still be a major expense, even if you have paid your mortgage off. If that is the case, you will still have maintenance costs, property taxes, utility bills, and insurance premiums to pay for. 

Even though many sources state that average housing costs during retirement are around $16,750 -$20,000, you know as well as I do, that there are many factors that will greatly affect your monthly expenses. 

Reaching retirement without any debt is a wise decision and should be at the forefront of your retirement planning. Managing to get your mortgage paid off before retirement will therefore help you minimize expenses. 

Here are some planning options to decrease your housing expenses, now and in the future. 

  • Rent out any extra rooms or the mother-in-law unit
  • Downsize to a more economic home
  • Use your age as an advantage! Many counties allow for reduced or exempt property taxes for those over age 65 and for Veterans
  • Move to a lower cost of living area (domestically or internationally) so that you can save on utility expenses and property taxes
  • Keep up on maintenance on your current home to avoid small to medium expenses from becoming large to huge expenses
  • Reduce or cut fees for infrequently used services

Think about how a decrease in housing costs could help offset increases in other major retirement expenses such as healthcare or food. 

By combining some of the above strategies and paying down your mortgage, you should be able to greatly reduce your annual housing costs for retirement. 

2. Fun and entertainment expenses in retirement

Retiring is not all about sitting on the couch and being afraid to spend money. Most retirees are eager to travel internationally, volunteer, have hobbies, and spend time on meaningful projects. 

The fact of the matter is that these activities require money and generate expenses, and sometimes are the reason behind increased yearly spending in retirement. Which, by the way, is okay.! I just want you to have a great retirement plan. 

People that study the process of retirement have recorded the common phases that most retirees pass through.

When someone retires, they find themselves in the “Honeymoon Phase.” They are ecstatic that they have so much free time and they want to travel, stay busy, and live out their retirement dreams. 

This is usually the stage that is also accompanied by high amounts of spending relative to the other retirement phases. I want you to be able to live to the fullest and not be held back, especially for lack of funds. 

Take the time to plan for the activities you are looking forward to. What do these activities cost? How much would you need per month or per year? 

Once you have a good idea of a more specific amount of money that you will need, you will be able to properly plan. Maybe you will be motivated to save a little more today, review your investments, eliminate fees (in all areas of life), and save on taxes. 

3. Healthcare & long-term care expenses in retirement

Unfortunately, U.S. healthcare costs just continue to go up and up. Also, we can couple that with the fact that retirees are now living longer. The result is that the overall costs needed for healthcare are getting close to the price of buying prime real estate in San Francisco!

So just how much should you plan on needing for healthcare expenses in retirement? Like anything, the actual number will depend on your health and specific needs. But a 65-year-old couple retiring in 2019-2020 may need around $320,000 over their retirement lifetime.

That healthcare expense figure is probably on the lower side. If you were to factor in chronic illness or the need for long term care, you will see that number skyrocket. 

Yearly estimated expenses are around $5,000-6,000 per year per person, according to the Department of Labor. 

The question is, how are you going to plan for this?

At age 65, you will become eligible for Medicare. Most people will receive Medicare Part A, premium free while the other “Parts” come with monthly premiums.

To calculate and estimate premiums visit this Medicare premium calculator. 

Premium values will be influenced by how you structure Medicare coverage (e.g. what “parts” you sign up for) and by your income. Higher-income earners pay higher Medicare premiums.

Another thing to plan for is that Medicare doesn’t pay for everything. So you may need additional insurance (which means additional costs). 

Beyond insurance (which we know doesn’t pay for everything and comes with monthly costs) how else can you plan for these expenses? 

Save…and save a lot!

You will need to cover premiums, copays, and other out-of-pocket expenses.

  • Use Social Security benefits
  • Pay for certain expenses using funds from your Health Savings Account (HSA), which will not be tax-deductible
  • Always speak to a tax expert prior to filing taxes
  • Again, use your age to your advantage and constantly seek senior discounts

Some of your non-covered health-related expenses may be tax-deductible. For example, non-reimbursed medical expenses exceeding 10% of adjusted gross income may be tax-deductible. This goes for some medical and dental expenses. 

Also, play some defense and do everything you can to prevent illness. There is no guarantee, but eating right, exercising, and practicing mental health may help ward-off unhealthy bodies. 

4. Insurance expenses in retirement

We have already talked about some of the necessary insurance types, like homeowners and health insurance. But, those aren’t the only ones that you are going to have. Other very important insurance types include:

  • Automobile
  • Renters
  • Long Term Care
  • Dental
  • Disability
  • Pet
  • Fire and Flood
  • Business or professional (if you continue to work)
  • Identity Theft protection
  • Umbrella Insurance, especially if you are a high net worth individual/family

And they all come with a monthly or yearly premium fee. You may want to evaluate which insurance types you could go without, but without putting yourself in a situation that could risk losing all of your retirement savings. 

Insurance can be a pain, but we usually only think that when we don’t need it. As soon as we do need the protection of insurance, it can more than pay for itself. 

Include the possibility of having these insurance types (and their accompanying monthly premiums) in your retirement plan. 

5. Taxes in retirement

Even though you may completely stop working, or reduce working, in retirement, you will still have income and still have taxes to pay. The best action to take now is to be aware of what events affect tax burdens. 

You will be taxed on your income 

  • Withdrawing money from pre-tax investments such as IRAs, 401(k), 457(b)
  • Selling stocks
  • Receiving pension payments
  • Social Security income (which may be taxable if combined income over a certain amount)
  • Income from annuities
  • Capital gains of stocks in certain account types or from selling a house which doesn’t qualify as a primary residence

Ways to plan for these taxes in retirement

  • Contribute to a Roth account to reduce your taxes in retirement
  • Convert a pre-tax account to a Roth (but speak with a tax expert first) as taxes are applied upon converting, so it requires a plan before you begin
  • Take required minimum distributions (because ignoring them comes with a tax penalty)
  • If you decide to continue working, you may want to look at different scenarios to see what tax bracket you will be in. It may be advantageous from a tax perspective, to not surpass a certain income level so that taxes can be minimized

Be aware that the 2018 Tax Reform increased the standard tax deduction

So What Is Your Plan?

Wow, that is a lot to plan for! There are so many factors that can affect your financial situation and your plans for the future. 

My goal is that you can live the best retirement possible with ULTIMATE MONEY CONFIDENCE! Because of that, if you need any help developing a plan or have questions about your current plan for retirement, please reach out to me so that I can help you! 

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