When we plan our retirement, we might envision it as a time filled with beautiful sunsets and enjoyment of the simple pleasures in life. Even if you don’t intend to tour the globe or take a cruise every year, there are still plenty of expenses that come along with the simple pleasures. Your road to and through retirement isn’t likely to be a straight one, as there are many costs that can significantly impact your budgeting if you don’t carefully plan ahead. Below, we examine some of the largest retirement costs that can catch you by surprise if you overlook them.
The List of Overlooked Costs
Even though there are quite a few potential costs you’ll incur during retirement, they likely won’t all affect you at one time. While you may have to manage a few concurrently, taking the time to plan ahead can pay dividends — sometimes literally.
- Inflation: Our monetary system is designed around gradually reducing the value of money through an effect called inflation. According to the Federal Reserve, the target inflation rate is 2% annually, which is intended to stimulate economic activity without putting too much pressure on savings. In theory, this is a predictable rate, but as we’ve seen over the years, actual inflation tends to run a little higher. Therefore, to plan, you can anticipate a bit more inflation than 2% occurring year over year. This means your investments should be able to offset 3–4% inflation while still increasing your actual savings in the bank.
- Taxes: We sometimes imagine that when we stop working, we’ll no longer have to pay taxes and can benefit from the savings that we’ve made. Unfortunately, you’ll still need to pay taxes during retirement on money gifted, capital gains on investments, real estate, and all the purchases you’ll need to make. Depending on the type of retirement account you have, you might also pay taxes on distributions. Individually, these taxes aren’t huge, but taken in aggregate, they can significantly reduce the value of what you’ve saved for retirement. When making your plans, envision that you’ll lose up to 15% of the value through various taxes and costs to pay for what you need.
- Early Retirement: Despite the retirement age being 65, CNBC reports that more people are retiring at 59. A significant portion of the people retiring at this age are doing so because of layoffs, downsizing, or medical needs. Given that these reasons are unplanned and often unexpected, it’s important to plan for the possibility that your retirement may begin a few years earlier than you anticipate.
- Health Expenses: Health issues can crop up later into retirement. As medical science advances, so do the costs of treatments, which the AARP advises increase faster than the overall inflation rate — often 5% in a single year. These costs can be significant, especially when they involve invasive medical care that can also affect your lifestyle. In some cases, health expenses can be coupled with needing more professional care, leading to costs associated with a different living situation.
- Retirement Communities: For those who are generally healthy, retirement communities can be a good way to simplify life by reducing the costs associated with home ownership and bundling many of the lifestyle expenses that retirees face. Nevertheless, these communities also have costs, namely for the added conveniences and care opportunities that they present.
- Nursing Homes and Assisted Living: Often associated with the aforementioned medical costs, it’s possible that you may need to pay for care in a nursing home or other assisted living facility during retirement. This care comes at a price, with the average cost exceeding $100k per year, according to SeniorLiving.org. For this reason, many people opt to plan carefully even if they have family members willing to help with in-home care and living situations.
- Living Longer: With earlier retirement becoming more common and medical advances helping people live longer, many people spend more time in retirement than in decades past. While extra years spent near friends and family are definitely positive, living longer means you’ll be spending longer, too.
- Home Maintenance: Even when you’re not working, your home will still need care and maintenance. These expenses are subject to inflation like the rest of the economy, and newer appliances can bring added costs with their added conveniences. If you plan to downsize your home, you may also want to put away for the “fixing up” costs prior to selling.
- Family Emergencies: Crises can arise at any point in life, whether for you or your close family. Children, siblings, nieces and nephews — anyone may run into a need with no one else to turn to. You may find yourself wanting to withdraw money from your retirement accounts to help out the people who matter most, and it can help to anticipate these costs by setting up a discretionary emergency fund.
- Sandwich Generation: Toward the end of your working life, you may enter what’s called the “sandwich generation,” which is a time in your working life when you’re providing financial assistance both to your retired parents and your children who are not yet established in careers. This time can be filled with added pressure to bulk up retirement accounts just as you might experience surprise expenses.
- Economic Downturn: Every so often, the economy enters a recession, which can have a big impact on your savings plans. Both the value of your existing assets and your income may experience downturns just as inflation starts to ramp up a bit higher. While the government tries to mitigate the damage through monetary and social policies, you may find yourself feeling the need to tighten your budget.
While retirement planning often focuses on expected expenses like housing, healthcare, and daily living, unforeseen circumstances can arise, such as unexpected medical emergencies, home repairs, or changes in the economic landscape. Having a financial cushion or contingency fund can be a lifeline when you’re faced with these surprises so you can navigate challenges without compromising your quality of life. By incorporating flexibility into retirement planning and setting aside funds for unforeseen events, you can approach your golden years with confidence, knowing you’re equipped to handle whatever financial curveballs may come your way.
Resource Links
“10 Biggest Expenses in Retirement” via the AARP
“This Is a Retirement Surprise You’re Probably Not Planning For” via CNBC
“FAQs” via The Federal Reserve
“Nursing Home Costs in 2023” via SeniorLiving.org