Some costs can be reduced or eliminated in retirement, while other expenses might remain the same or even increase as you age. You won’t have to pay commuting costs or buy expensive clothes for work in retirement. But you might face new costs as you use more health care services or take up new hobbies to fill your days.
Not to mention, inflation means that costs when you reach retirement age will almost certainly be higher than they are when you are saving.
“Regardless of the expenses you’ve budgeted, do not, under any circumstances, neglect to consider (and plan for) the inevitable effect of inflation upon your retirement. Money now simply doesn’t have as much spending power as money in the future,” Mark Boehm, principal at Alpha Wealth, says.
Considering that your day-to-day expenses will change — and will cost more than they do now — remember to factor the following expenses into your retirement budget.
— Housing.
— Medicare premiums.
— Health care.
— Taxes.
— Food.
— Emergencies.
— Entertainment.
— Travel.
— Grandchildren.
— Leaving a legacy.
[See: Expenses You Can Eliminate in Retirement.]
Housing
Housing is likely to be your biggest cost in retirement.
According to Gary Grewal, certified financial planner and author of “Financial Fives,” there are several housing-related expenses you should incorporate into your retirement budget, including property taxes and home repairs.
“Many retirees think when they pay off their home, the house payment goes away but (property taxes, insurance and escrow fees) never do,” he says. Plus, home repairs get more difficult to DIY as you age, he adds.
There are a variety of ways to significantly reduce your monthly housing bills. Paying off your mortgage can eliminate a major monthly expense, leaving only the cost of taxes, insurance and maintenance.
Another option is to downsize to a home that costs significantly less and free up home equity to pad your nest egg. Moving to a new place with a lower cost of living can improve your retirement finances. A smaller home in a less expensive neighborhood could also reduce your heating, cooling, maintenance and tax bills.
Medicare Premiums
Most people don’t pay a premium for Medicare Part A hospital insurance. Medicare Part B medical insurance charges a standard premium of $170.10 in 2022, and high-income retirees pay an additional premium. Medicare Part D prescription drug plans charge a separate premium that varies depending on the plan you select each year. There might also be a third premium if you select a Medigap plan that will pay for some of Medicare’s out-of-pocket costs.
If you fail to sign up for the various parts of Medicare on time, late enrollment penalties could be added to your premiums.
Health Care
“Health care expenses can often be a blindspot for retirees,” Zach Morris, CFP and co-founder and managing partner at Paces Ferry Wealth Advisors, says. “Historically they inflate quicker than other living expenses and there are some variables to the expense.”
Medicare Part B has a $233 deductible in 2022. After that, you will be expected to pay for 20% of the Medicare-approved amount for most of the medical services you use unless you purchase another insurance plan to supplement traditional Medicare. Medicare Part A has a $1,556 deductible if you are hospitalized, and there are additional coinsurance charges if your hospital stay exceeds 60 days.
Some preventive care services are covered by Medicare with no out-of-pocket costs, but there are also several types of commonly needed medical services that typically aren’t covered at all, such as eyeglasses and hearing aids.
Taxes
Senior citizens often qualify for extra tax breaks, but there are some new taxes that affect retirees.
After years of deferring taxes on your retirement savings, you will need to pay income tax on each withdrawal from your traditional 401(k)s and IRAs. Distributions from tax-deferred retirement accounts are required after age 72 in order to avoid a stiff 50% tax penalty.
However, there are several ways to strategically withdraw money from your retirement accounts and reduce your retirement tax bill. Part of your Social Security benefit could also be taxable if your retirement income tops a specific threshold.
[Read: How to Get the Biggest Tax Refund This Year.]
Food
You can save money on food in retirement if you are willing to give up expensive convenience foods and take the time to cook healthy meals at home. However, the additional free time you have in retirement might tempt you to spend more on lingering lunches with friends and expensive dining experiences.
“I suggest at least doubling your grocery budget,” Grewal says.
You may be able to qualify for senior discounts at some restaurants or even at the grocery store.
Emergencies
The need for an emergency fund doesn’t end when you retire. You will continue to need to make home repairs, replace worn-out appliances and fix your car. An emergency fund is essential to avoid spending your retirement savings too quickly. You don’t want to disrupt your retirement draw-down strategy every time something breaks. Make sure your plan includes funds set aside to cope with emergency expenses.
Entertainment
Your newfound free time in retirement provides opportunities to try new things, but those new experiences can get expensive. Fortunately, deals for seniors abound, such as discount admission to museums and movies, and some colleges offer low-cost classes for retirees. Many communities provide plenty of free or affordable entertainment to people of all ages, ranging from summer concerts to library seminars, and senior centers often provide social activities just for retirees.
“Many people underestimate this, but the reality is if you are no longer working 40 hours per week, you now have to fill that time with something, and most people choose leisure, volunteer work or travel,” Grewal says.
Travel
Retirees finally have time to travel as much as they want. The only limiting factor is your budget.
Senior citizens and AARP members often enjoy discounts on hotels and rental cars. There are also creative ways to travel affordably if you’re willing to stay with friends or swap homes with someone else. Retirees have the advantage of being able to travel during weekdays and off-peak times, which could save you money and help you avoid crowds.
[See: Great Senior Discounts for 2022.]
Grandchildren
Nothing can throw off a retirement budget like the arrival of a grandchild. Grandchildren can change your financial priorities. Some grandparents like to lavish gifts on their grandchildren, travel to see them frequently, help provide child care or set up a trust to help provide for their future. Each of these scenarios can significantly change your retirement budget. Remember to factor gifts or bequests to heirs into your retirement plan.
Leaving a legacy
Some retirees would like to leave financial gifts to their children, grandchildren or other heirs or pass on treasured items such as jewelry, furniture or other heirlooms. You might want to write a memoir or curate family photos.
Think about whether you plan to include charitable giving to meaningful causes. Make sure your wishes are clearly spelled out in writing so that your plans can be realized.
“Charitable giving can be an important consideration when planning your retirement expenses. If this is an important goal, it may be advisable to front load a charitable gift fund during your higher-income years prior to retirement,” Morris says.
“This could allow you to obtain a tax deduction for your giving, whereas if you give smaller gifts in retirement you may not receive any tax advantage,” he adds.
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10 Costs to Include in Your Retirement Budget originally appeared on usnews.com
Update 03/27/23: This story was published at an earlier date and has been updated with new information.
