Most of us know how much money we have coming in and going out each month. It doesn’t have to be to the penny. But, we have at least a ballpark figure so that you can cover various expenses.
But, what happens when you retire?
Well, some areas probably aren’t affected all that much. If you plan on staying in your current home, you should know how much utilities and property taxes will set you back. There might be a slight increase, however, since you’re spending more time at home.
At the same time, because you aren’t going to work each day, you’ll see a decrease in other categories. For example, you’ll be spending less money on commuting and maintaining a work wardrobe.
Overlooked Retirement Expenses
To ensure that you have enough money saved, here are 8 overlooked retirement expenses. Being aware of them allows you to figure them into your future financial calculations.
Regardless of the age group, housing is the largest spending category. In fact, according to data from Employee Benefit Research Institute (EBRI), those aged between 65-74 can expect this expense to eat up around 45% of their budget.
To be honest, this shouldn’t be all that surprising. After all, this includes mortgage, rent, property taxes, insurance, maintenance, and repairs. What is concerning though, is that Harvard’s Joint Center for Housing Studies reports that 46% of homeowners between the ages of 65-79 still have a mortgage. And, this is also true for one in every four people over 80 years old!
The good news? You actually do have a lot of control when it comes to this expense, such as;
- Paying off your mortgage before retiring.
- Budget in advance for inevitable expenses like utilities, property taxes, food, and essential renovations like making your home safer.
- Taking in a tenant or renting out a spare room on Airbnb.
- Downsizing to a smaller home — even if it’s still in your current community.
- Relocating somewhere that’s not as expensive.
2. Health Insurance/Long-term Care
Even if you were self-employed, you probably had health insurance through an employer plan. That’s not going to be around when you leave the workforce. And, Medicare doesn’t kick in until your 65.
Also, speaking of Medicare, it’s not always free. Many are flabbergasted to find out until it’s too late that Medicare doesn’t cover premiums, hearing aids, dental care, and routine eye exams. And, you can also forget about long-term care costs.
Another report from the EBRI claims that some married couples will need as much as $363,000 in health expenses from the age of 65 through the end of their lives. Also, anticipate long-term care costs to range anywhere from $1,603/month for adult day health care at a community or assisted living facility to $8,821/month for a private room in a nursing home.
If you need insurance, you can shop for an affordable plan on the HealthCare.gov exchange. You might also want to contribute to a Health Savings Account, which is available after age 55, as well as purchasing a long-term insurance policy. Furthermore, look into platforms like GoodRx to save on prescriptions.
Before all of that, however, make your health a priority today. You know the drill. Be physically active, get enough sleep, and eat a nutritious and balanced diet.
The good news? You don’t have to worry about payroll taxes in retirement. The bad news? You’re still responsible for paying certain federal and possibly state income taxes.
Take Social Security as an example. In most, this is taxable up to 85% of the benefit. Also, tax-deferred accounts like an IRA, 401(k), or annuity are considered income so they’re also taxed when you make withdrawals.
You can reduce your taxes in retirement by converting your traditional 401(k) or IRA accounts into a Roth IRA. Not only does this avoid you from getting taxed when you make a withdrawal, but there is also no required minimum distribution (RMD) with Roth IRAs.
Also, if you currently don’t reside in one of these states, consider moving to;
- New Hampshire
- South Dakota
Why? Because you won’t have to pay taxes on your retirement income.
Just because you’re not commuting daily doesn’t mean that you won’t have transportation costs. In fact, according to AAA, “the average annual cost of new vehicle ownership climbed to $9,282, or $773.50 a month.” What if you own your vehicle outright? You still need to take into account insurance, maintenance, registration, and filling up the gas tank.
You do have some other options to reduce your transportation costs — especially if you’re among the almost 80% of seniors over 65 who live in car-dependent suburban and rural communities. If you own two vehicles, consolidate to just one. Moreover, shop around for more affordable car insurance.
There are also ride-sharing services like Uber and Lyft if you do not own a vehicle. And, be aware of free or discounted senior transportation options. Examples include county public transportation services and good, old-fashioned public transportation.
You can also enter your ZIP code at eldercare.acl.gov or call the national toll-free Eldercare Locator hotline at 800-677-1116 to check what senior ride programs are available in your area.
5. Food, Hobbies, and Entertainment
According to the Bureau of Labor Statistics data, retirees on average spend $483 on food. That seems reasonable. And, we all have to eat.
You can keep this cost low, however, by sticking to a grocery list and resisting impulse purchases. Also, make the most out of coupons. And, when going out for meals, take advantage of senior discounts.
It was also found that retirees spend just shy of $200 per month on entertainment. Again, I also think that that’s fair. But, you should be on the lookout for free or affordable alternatives. Some ideas would be DIY crafts, geocaching, catching a matinee, or visiting museums on days they offer free admission.
If traveling is a priority, you may be able to get a senior discount at hotels and airlines.
“Inflation can be a big deal — especially after retirement when your income won’t keep pace with the increased costs of goods and services,” explains Will Kenton over at NewRetirement.
“But inflation over the last ten to fifteen years has not looked like the inflation in our collective memory,” he adds. “So many people think it’s no longer a problem. The cost of most everyday goods and services as measured by the Consumer Price Index (CPI) has stayed low since the turn of the century.”
Of course, don’t expect this to be the norm. “If inflation is always and everywhere a monetary phenomenon, as Nobel Prize-winning economist Milton Friedman put it, we’re overdue for a dramatic increase in prices,” he adds. “Since 2001, there has been a dramatic increase in the supply of money in the U.S.”
“Furthermore, the COVID-19 disaster has brought on a new wave of government borrowing and another dramatic increase in the money supply,” Kenton states.
How can you plan for inflation? The easiest answer is to have a balanced and diversified portfolio. Preferably, your retirement savings should contain a blend of safe and risky investments to ride out inflation.
7. Sandwich Generation Costs
Are you taking care of your aging parents and children? If so, then you’re what’s called a “sandwich generation.” And, this can make financial planning stressfully brutal.
But, it’s not entirely impossible.
For starters, create a budget and stick to it as much as possible. You also shouldn’t let this derail your own retirement. Contribute what you can to your own retirement, preferably tax-advantaged accounts such as a 401(k), 403(b), Roth IRA, or Health Savings Account (HSA) that can be matched by your employer.
Most importantly? You need to have the “money talk” with your family. You need to forthright on what you can and can not afford.
Across the world, people are living longer. While that’s certainly welcome news, that also means you need to have enough money stashed away to cover essential expenses.
Of course, this isn’t easy to predict. But, if possible, save more money than originally planned. You may also want to invest in an annuity as this provides you with a guaranteed monthly income for the rest of your life. If there’s anything left over, you can pass that on to a beneficiary.