Yahoo Finance Retirement Savings: 6 Reasons Your Spending May Not Shrink in Retirement
Many people think of retirement as a time when you can do what you want without having to worry about work or money. The common assumption is that your expenses will be minimal during retirement. After all, you don’t have to pay to commute to work, your home may already be paid off, and your life may be less busy, right?
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One common rule suggests that people should plan on spending about 70% to 80% of their pre-retirement income during retirement. However, while day-to-day spending often declines in retirement to some degree, your total expenses may remain high or even increase during retirement.
Here are some reasons why your spending may not shrink like you planned during retirement.
Healthcare
Your healthcare costs tend to increase as you age. You may have more health issues and doctor appointments than in previous years. Even with Medicare, you will still have to pay for healthcare costs.
“With Medicare, there are some elements that are not covered under this program,” said Ashley Akin, CPA, senior tax associate, and an expert contributor at MakeGood.
Akin said she had a client who faced significant dental and hearing aid expenses which her Medicare didn’t cover. These expenses end up being paid for out of pocket.
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Taxes
Some retirees may have lower income during retirement, resulting in a lower marginal tax bracket and a smaller income tax bill. However, if you have retirement accounts with a significant amount of money subject to required minimum distributions, you could end up having higher income than before retirement. That would lead to greater income taxes than you had previously.
Withdrawals on Roth IRAs, on the other hand, are tax-free and not subject to required minimum distributions. Your Social Security benefits could also be taxable if your income exceeds certain limits.
Home Expenses
Even if you’re able to pay off your mortgage before you retire, you may still have home-related costs. You’ll still have to pay property taxes, insurance, and maintenance costs. If home values rise in your area, your property taxes might end up increasing as well.
“If you are looking at your retirement, you may think that your home will be paid off, so therefore, you eliminate the mortgage from your projection,” says Jennifer Aube, vice president and financial advisor at Wironen Aube Wealth Management. “However, as time passes, things break down and need repair.”
Aube continued: “If you have recently updated your home, you may also need to consider expenses in the home related to aging in place. Shower bars, moving a bedroom downstairs, etc. may need to be considered at some point.”
If you’re unable to do some of the work yourself, you may need to hire someone to do it for you which is just another expense to consider.
Travel
Many people want to travel during retirement. They may feel like they finally have the time and money to take the trips they have always wanted. But traveling can get expensive.
“If you retire at an age where you are healthy and active, you may spend more in travel and other recreation,” Aube said. “You may take more trips with your spouse, friends, and family as well. If spending stays the same, inflation will also begin to erode away at your purchasing power and also cause your spending to be higher.”
To help reduce the costs there are plenty of ways to travel more affordably. Some hotels and airlines offer senior discounts. Or there may be senior discounts for activities you may want to do during your travels, like museum tickets.
If you are traveling and are on Medicare, remember that it generally doesn’t cover medical expenses outside the United States. Some Medicare supplement policies provide emergency healthcare coverage while you are traveling outside the United States. You could also buy travel insurance that includes healthcare coverage. Just be sure to do your research to find the best option for you.
Entertainment
When you go from a busy working life to a retired life, you will have much more free time on your hands. You might struggle to fill your days now that you aren’t working.
To keep yourself busy, you may schedule classes, meet friends for lunch, join groups, attend more shows and movies, etc. While there are free and low-cost activities to keep yourself busy, there may be many things that you want to do that cost money, increasing your monthly spending.
Shopping
Along with feeling the need to spend more on entertainment during retirement, you may also spend more on shopping.
You have more free time to shop and therefore may end up spending more. You may find things around your house that you have always wanted to upgrade, and now you have the time to do so. Or you may want to spoil your grandchildren. Just make sure you’re taking the time to shop and around to find the best prices.
The Bottom Line
There are many reasons why your retirement spending might end up being higher than you had expected. To be prepared, make sure you’re contributing enough to your retirement accounts. And once you’ve made the more to retirement, utilize a budget to keep an eye on your expenses. Remember, you may live longer than expected, so make sure you have enough money to cover you for the rest of your life.
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