Will you spend less in retirement? You might think so, and it’s true for some budget categories. Work-related costs like commuting, business clothing and meals away from home will decrease during retirement. Of course, those expenses may already be fairly low for those who work at home.
There’s a widespread rule of thumb that retirees need about 70% to 80% of their pre-retirement income. However, this guideline overlooks the potential for inflation and increased spending in other areas like travel, hobbies and especially health care.
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The Myth of Declining Expenses
Along with work-related expenses, the costs of raising children also typically decrease in retirement. For example, education can take up a big chunk of household savings during your working years.
But eliminating those expenses doesn’t necessarily mean your retirement will be cheaper.
“While some expenses do decrease, many forget that other costs, like health care, travel and home maintenance often increase with age,” said James Shaffer, managing director at New York-based Insurance Panda, in an email.
Additionally, Shaffer said, retirees may be tempted to spend more on hobbies, dining out or bucket-list experiences, especially in the early years when they’re healthy and energetic.
Underestimating living expenses in retirement often comes from focusing on costs that may decline, such as housing or buying fewer groceries for a smaller household.
“For example, retirees don’t really anticipate the cost of home repairs, helping adult children financially or out-of-pocket medical expenses, which tend to grow significantly over time,” Shaffer said.
Underestimating longevity is also a trap. A healthy 65-year-old retiree may live another 30 years. Using average life expectancy tables frequently results in significant gaps in retirement funding.
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The Myth of Lower Expenses Persists
Pre-retirees may not realize it, but taxes will remain a significant expense.
“Americans are typically told they will be in a lower tax bracket in retirement,” said Michele Lee Fine, founder and CEO of Cornerstone Wealth Advisory in Jericho, New York, in an email.
“That may or may not be the case, as every dollar that’s withdrawn from a qualified retirement account is considered taxable income,” she said, adding that 100% of those withdrawals are taxable at ordinary income rates.
The nature of expenses continues to change. For example, the budget for a person who retired in 2015 didn’t include the costs of mobile apps or the numerous digital subscriptions that have replaced a daily newspaper.
“Watching TV used to be free; now we have a cable bill to pay, a cellphone bill, and devices that are needed or desired,” Fine said. “Most people don’t consider the countless future expenses they can’t even anticipate now.”
Fast-Growing Health Care Costs
Perhaps the biggest culprit behind rising retirement costs is health care.
A November 2024 report from brokerage Fidelity estimated that, on average, a 65-year-old retired couple needs $330,000 in assets set aside today, after taxes, to pay for expected lifetime health care expenses. Factors such as chronic illness and longevity can increase that amount.
Today’s retirees are less likely to have long-term care insurance, as costs have risen dramatically. Insurance industry actuaries underestimated the rise in costs for LTC insurance, so carriers had to boost premiums significantly.
But the problem hasn’t gone away. According to the National Council on Aging, people turning 65 today have an almost 70% chance of needing long-term care in their lifetime.
“Studies show that people need nursing care. Rarely do they have long-term care insurance,” said John Vandergriff, owner and wealth planner at Blue Ridge Wealth Planners in Knoxville, Tennessee, in an email.
“What you’re not spending on your lifestyle, you need to divert to health care expenses adjusted for inflation long-term,” he said.
The Role of Inflation
Retirees often underestimate the threat of inflation, which has risen rapidly in recent years.
“Inflation quietly destroys purchasing power, particularly when retirees are living on fixed incomes or low-growth investments,” Shaffer said.
“A basket of groceries, for instance, might seem affordable at age 65 but could be significantly more expensive at 75 or 85,” he added. “This is why overlooking inflation in retirement planning can lead to dangerous shortfalls later in life.”
To prepare for these challenges, he said, pre-retirees should prioritize strategies like building an emergency fund, regularly updating budgets and planning for health care expenses with tools like health savings accounts.
“Downsizing homes or relocating to areas with a lower cost of living can also create a financial cushion,” he said.
Pre-retirees may want to consider creating income streams from sources such as part-time work, rental properties or dividend-paying stocks to help them maintain spending flexibility in retirement, Shaffer added.
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The Hidden Costs of Retirement: Why Your Expenses May Be Higher Than You Think originally appeared on usnews.com
