If you’re planning to save money in retirement—not saving for retirement, but figuring that living in retirement will cost less than day-to-day life now—you’re not alone. Sure, there will be some costs eliminated from your daily life, like transportation to and from the office, work clothes, and lunches out during the week. But there are many areas where you may find yourself spending more than ever before, and some of them might surprise you.
That’s an important consideration. During our working years, it’s easy to think: If I spend now, I’ll just work and earn more. But in retirement, that narrative must shift—there is no “more” coming in. Likewise, many of us like to believe that if we start running out of money, we can pivot and head back to work, but that option isn’t as viable as we often assume it to be. It can be difficult to find a job once you’ve been out of the workforce for a while. Plus, at a certain point, there’s a good chance your health will start to deteriorate.
So what do you do? Anticipate the unexpected. Here’s a look at potential budget drainers that can be worrisome for individuals on a fixed income—and what you may be able to do about them.
Inflation and Taxes
If you don’t plan appropriately, inflation can really eat into your purchasing power over the next several decades. Many pension plans don’t offer cost of living adjustments (COLAs), and $1,000 a month today isn’t going to buy nearly as much in 20 years. (For perspective, it would take nearly $1,600 today to buy the same basket of goods as $1,000 purchased in 1998.)1 Thankfully, there are ways retirees can make sure their portfolios live up to their longevity.
One way is to avoid being too safe —in other words, don’t put all your money in investments that (at current interest rates) will not outpace inflation in the long term. Consider building a risk-adjusted portfolio—if you’re not sure about how to put one together yourself, a financial planner can help. Another move you can make is to consider whether you can delay social security payments for as long as possible, which will allow your eventual benefits to increase by about 8% every year you defer from age 62 to 70.2
Additionally, many people with several streams of income (such as a pension, social security, 401(k), or an IRA) may be caught off guard when it comes to taxes. While many people assume their income tax bracket will be lower in retirement, it’s not out of the question to find yourself in the same or even a higher bracket, if you’ve done an excellent job of saving tax-deferred. Unfortunately, you can always count on Uncle Sam to come calling for what’s owed, so be ready to pay.
"During our working years, it’s easy to think, 'If I spend now, I’ll just work and earn more.' But in retirement, that narrative must shift—there is no 'more' coming in."
Travel & Shopping
Vacations with grandkids and siblings. Visiting old friends. High school reunions. Anniversary getaways. Even just the occasional get-out-of-dodge mini break. All these adventures sound incredible, but many retirees may find they have more time than money, so sitting down and working out a travel budget is an absolute must. When it comes to spending on material goods, many of us may need to move our shopping habits off Fifth Avenue and into the aisles of Target or Old Navy. It can be incredibly difficult to change 50 years worth of habits, or to be told that you “can’t” have something you’ve always enjoyed. People become attached to their ways of doing things in life, and the changes required are as much emotional as they are financial. Take the guesswork out of the “What can I afford?” equation and lay out a budget for shopping and non-essentials early on (preferably before you actually stop working). Trying to do the math in your head when you get to the register is a sure way to overspend.
When’s the last time your house had a new roof, a new water heater? How much were your property taxes last year? Often people don’t realize how much their large homes cost them in terms of utility bills, taxes and maintenance until they find themselves on a fixed income. Also, as homes age, expensive repairs become essential rather than wish-list items. It may be that you decide to downsize—42% of Americans eventually choose to do so in order to save money or be closer to family, according to a survey by TD Ameritrade.3 Before you make a change, do your homework on the cost of taxes and real estate in the area where you’re planning to move, and the math on the cost of selling your home and moving. And note: If you want to pocket some serious cash on the sale of your home, make sure you take downsizing seriously. For example, does it really make sense to sell your home for $350,000 and buy another for $300,000? Don’t be afraid to explore garden home and apartment options.
Today, the average couple is projected to need $280,000 for unreimbursed medical expenses in retirement, excluding long-term care, according to Fidelity.4 Additionally, end-of-life care for a patient’s final five years is estimated to cost between $217,820 and $341,651, depending on whether they suffer from dementia, according to Morningstar research.5 As we age, we may find ourselves spending more on things like medication and specialty care, and it’s important to be prepared for ever-increasing costs.
From 2006 to 2017, the average cost of healthcare deductibles increased from $303 to more than $1,200, according to Kaiser.6 Discuss your plan for handling your long-term care needs with your family. It’s not just about insurance—you need to determine where you’d like to receive care and who you’d like to provide it. If you’re still working and you have a high deductible health plan that makes you eligible to open an HSA, start socking money into that tax-advantaged account. Any earnings accumulate tax-free and you can pull it out tax-free for medical expenses for the rest of your life.
Kathryn Tuggle contributed to this article.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.