Don’t Forget These Costs in Retirement
Do you have a retirement budget? A budget can be a powerful tool to help you manage your expenses and stay on-track to reach your biggest financial goals. If you don’t have a budget, you’re not alone. A recent study found that a third of all Americans don’t use a budget.1
Of course, a budget has to be accurate. If you forget to include certain expenses in your budget, it won’t be a very effective planning tool. That’s what makes it so hard to budget for retirement. You can’t predict the future, so how can you know what your expenses will be when you retire?
You may not be able to make a precise projection, but you can estimate your spending based on your goals, objectives, and current spending levels. Some expenses may be obvious, like groceries, utilities, housing, and more.
But not all retirement expenses are quite so easy to predict. In fact, there are a few potentially sizable expenses that may not even be on your radar. Below are a few such expenses. If you haven’t budgeted for these costs in retirement, now may be the time to do so.
That’s right. Just because you stop working doesn’t mean you’re done paying taxes. You could still face taxes in retirement on a wide range of income sources, including:
- Social Security
- Defined Benefit Pension benefits
- 401(k) distributions
- IRA distributions
- Annuity distributions
- Investment income
- Business income
- And more
You could also face property taxes, sales taxes, capital gains, and other forms of taxation. A financial professional can help you analyze your potential tax liability and build those costs into your retirement budget.
Health Care and Long-Term Care
Think Medicare will cover all your health care costs in retirement? Think again. While Medicare is a valuable resource, it doesn’t cover every treatment. Even when something is covered by Medicare, the coverage is often partial. That means you’ll likely have copays and deductibles in addition to your monthly premiums.
In fact, Fidelity estimates the average retired couple will pay $285,000 out-of-pocket on premiums, deductibles, copays, and for services not covered by Medicare.2 Assume you live 25 years in retirement. That’s more than $10,000 per year in out-of-pocket healthcare costs.
That $285,000 doesn’t include a major health-related expenses – long-term care. Long-term care is ongoing assistance with daily living activities like cooking, bathing, getting dressed, and even basic mobility.
So how much will you spend on long-term care? It’s hard to say. The U.S. Department of Health and Human Services estimates that 70% of retirees will need long-term care at some point. However, there’s wide variance in just how much care each person will need. Twenty percent of seniors will need care for more than five years. A third of seniors will never need it at all.3
The average man is expected to need long-term care for 2.2 years, while the average woman needs it for 3.7 years.3 That care can come in many forms. It could be provided by a family member or a part-time caregiver. It could involve adult daycare. Or it could mean moving to assisted living or even a nursing facility.
Every year, Genworth studies average long-term care costs around the country. In 2019, the average monthly costs were as follows:
Adult Daycare – $1,625
Assisted Living – $4,051
Full-time Home Health Aide – $4,385
Private Nursing Home Room – $8,517
You can’t predict what kind of care you will need or how long you will need it. However, it’s easy to see how those costs can add up if you need months or years of support.
“Other” Housing Costs
Will your mortgage be paid off before you retire? If so, that will likely free up a large chunk of cash in your budget. Even without a mortgage, though, you will still likely face housing costs like:
- Property taxes
- Homeowners insurance
How much will these items cost you in retirement? It’s hard to say. The average homeowner spent $1,200 on insurance in 2019.4 They also spent an average of nearly $5,000 on repairs and maintenance.5 Of course, those figures depend on the size and value of your home. Downsizing is one possible way to keep these costs under control in retirement.
Possibly the most difficult cost to budget for is inflation. That’s the gradual increase in prices for goods and services. Inflation varies from year-to-year but is usually minimal. However, over time, even a minimal amount of inflation can significantly increase prices.
Does your retirement strategy account for inflation? How will you grow your assets and income to keep up with rising prices?
Ready to develop your retirement budget? Let’s talk about it. Contact us at Retirement Solved. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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