When you retire, you will have some major expenses. Do you know what they are?
Food, groceries and utilities will probably take their fair share of your budget, as they did during your working years. But what are you missing?
Following are some retirement costs that people often forget to figure into their financial calculations — along with an idea of how much they might cost you during your golden years.
1. Health insurance
You’ll have Medicare in retirement, so you don’t need to worry about health insurance, right? Not exactly.
First, if you retire early, you’ll need to buy your own health care coverage for a few years. Unless you qualify because of a disability, you won’t be eligible for Medicare — the federal health insurance program primarily reserved for seniors — until you’re 65.
Next, Medicare doesn’t mean totally free health care, as we’ve detailed in stories like “5 Common Medical Expenses That Medicare Won’t Pay For.”
In fact, for many Medicare recipients, recurring costs like premiums and deductibles tend to rise each year.
Some seniors have the option to buy a supplemental Medicare health insurance plan, also known as a Medigap policy, to cover some out-of-pocket costs. But even if it saves you more money than it costs you, a Medigap policy is still an expense in itself.
How much this retirement expense costs: U.S. households led by someone who is age 65 or older spent $6,833 on health care in 2019, on average, according to the Bureau of Labor Statistics.
2. Long-term care
Long-term care is among the expenses that Medicare generally does not cover.
Another federal health insurance program, Medicaid, does cover long-term care, but you must meet specific requirements to be eligible for Medicaid.
So, unless you had the foresight to purchase a long-term care insurance policy — not cheap in and of itself — you might have to cover the cost of long-term care yourself if you need it.
How much this retirement expense costs: National median costs range from $1,603 per month for adult day health care at a community or assisted living facility, to $8,821 per month for a private room at a nursing home, according to the latest annual Genworth Cost of Care Survey.
3. Home renovations
About one-third of adult homeowners expect their homes to need significant updates to enable them to keep living there throughout retirement, a 2018 AARP survey found.
Known as “aging in place,” this practice brings its own set of costs. Doorways may need to be widened, a bedroom added to the main floor or a bathroom renovated to accommodate the limited mobility that often comes with advanced age.
How much this retirement expense costs: Cost vary widely, depending on the project and its extent. We examine the costs of some projects in “5 Home Improvements That Help You ‘Age in Place’.”
4. Federal income taxes
Federal income taxes are not necessarily an expense that ends when your working years end.
If your income drops when you retire, your taxes likely will drop, too. But that doesn’t mean your federal income tax bill will fall to $0.
There are some types of retirement income that Uncle Sam generally cannot touch, as we detail in “Retirees Can Dodge Taxes on These 9 Types of Income.” But other types of retirement income — including withdrawals from traditional retirement plans — often are taxable.
Even Social Security retirement benefits are taxable in certain situations. About half of retiree households do owe taxes on a portion of their Social Security benefits, according to a recent survey from the Senior Citizens League.
How much this retirement expense costs: U.S. households led by someone age 65 or older paid $5,063 in federal income taxes in 2019, on average, according to the Bureau of Labor Statistics.
5. State income taxes
As with federal income taxes, state income taxes don’t necessarily stop when you stop working. And if you live in an area that levies local income taxes, those won’t necessarily stop, either.
For example, some states tax Social Security benefits, and many states tax certain other types of retirement income to some extent. You can learn more about your particular state in “How All 50 States Tax Your Retirement Income.”
How much this retirement expense costs: U.S. households led by someone age 65 or older paid $1,107 in state and local income taxes in 2019, on average, according to the Bureau of Labor Statistics.
If you’re not driving to work every day, you may not even get in your car for days at a time. This is good if you have a paid-off car that is in good condition and has minimal wear and tear. But if you drive an older model or you’re still making payments on your car, owning a car can become an expensive investment for a retiree.
If you were once a two-car family, it might be time to sell one and pocket the cash. Even if the car is paid off, you’ll save on insurance and other ongoing costs. Or, depending on where you live, you could start using public transportation and ditch driving altogether.
How much this retirement expense costs: U.S. households led by someone age 65 or older spent $7,492 on transportation costs in 2019, on average, according to the Bureau of Labor Statistics.
That amount includes $2,792 for vehicle purchases, $1,383 for fuel and motor oil, $1,180 for insurance and $735 for maintenance and repairs.
While having the free time to travel is one of the best retirement perks, that travel can come at a cost — even after taking advantage of the senior discounts.
For other ways to lower your costs, check out “18 Ways Save on Every Kind of Travel.”
How much this retirement expense costs: Late in 2019, baby boomers said they expected to take three or four domestic trips and one or two abroad — and to spend more than $7,800 on travel — in 2020, according to an AARP travel survey. Of course, the pandemic likely changed those plans dramatically.
8. Needy adult children
Beware the dreaded boomerang kids! Much has been written about adult children returning home to roost, but that shouldn’t be your only concern.
No, you also have to worry about children who might ask you to co-sign loans and then bail on the payments, leaving you to hold the bill. Or they may need your money to pay their rent, student loans, phone bills or any of dozens of other possible expenses.
What this retirement expense costs: Costs can vary widely, depending on how many children you have, their financial situations and your willingness to say “no.”
The good news is that you can avoid this expense entirely by saying no or choosing cost-free ways to help children who are struggling financially — see “6 Ways to Help Adult Children Without Going Broke.”
The more free time you have, the more you’ll be able to indulge in entertainment.
Shows like musicals, plays and other live performances don’t come cheap. Consider buying a theater season pass or buying tickets to small, local theaters rather than larger ones. You’ll not only support local art but you’ll also likely save some money.
If you’re into watching more live sports in retirement, consider watching local, regional or school teams, rather than professional sports teams.
How much this retirement expense costs: U.S. households led by someone age 65 or older spent $2,381 on entertainment in 2019, on average, according to the Bureau of Labor Statistics. But that spending category includes pets, which accounted for $563 of that total.
This isn’t something you can pencil into your budget as a line item, but inflation can’t be ignored. It’s tempting to do so, though, since the U.S. has spent the past decade in a low-inflation environment.
However, you have to plan for what the next 10, 20 or 30 years will bring. Heaven forbid we return to the age of double-digit inflation rates, which were last seen in the early 1980s, but that’s always a possibility.
Rising inflation has the potential to erode your money’s purchasing power and push up the cost of everything you buy — from food to rent to travel. Just take a look at “11 Everyday Items You Once Could Buy for Less Than $1.”
How much this retirement expense costs: Again, no one knows for sure where inflation will go in the future. What we do know is that it ran to 2.3% in 2019, the highest increase since 2011.
11. A long life
People are living much longer than they used to. A long life means extended opportunities to enjoy friends, family and hobbies, but it also compounds all the expenses detailed in this story.
Most notably, it gives inflation more time to eat away at the value of retirement savings and means more years covering health care expenses.
There is no way to eliminate most of these expenses in retirement, but there also is no reason to get blindsided. Work these costs into your financial plan so you’ll be ready for whatever may come.
How much this retirement expense costs: The cost of living a long life is even more difficult to predict than inflation. It is directly tied to how long you live, which depends on various aspects of your health.
To give you an idea, though, the Social Security Administration provides these averages:
- A man turning 65 today can expect to live to age 84.
- A woman turning 65 today can expect to live to age 86.6.
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