Preparing for retirement involves more than just saving money; it also means determining how you will use it. In the United States, many retirees are shocked to learn that their expenses don’t always go away when they stop working. According to reports from CBS News and Vision Retirement, health, housing, taxes, and lifestyle are the four major areas that are most important where money is spent.
But additionally, there are long-term and hidden costs that can surprise people. One statistic from Vision Retirement is that housing accounted for over one-third of the $60,087 spent by the average retiree household in 2023.
Medical bills can mount up, even with Medicare, and just like withdrawals from 401(k) and IRA accounts, a portion of Social Security income may be subject to taxes too.
The biggest expenses in retirement
- Health: medical care is the largest, you still have to pay for prescription drugs, procedures, copayments, and premiums even with Medicare. “Many of our clients are surprised by how much they pay out of pocket for medical care,” stated planner Tyler End. “Even with Medicare, out-of-pocket expenses for premiums, prescriptions, and procedures can add up quickly,” stated Frank Davis, president of New Era Financial. According to CareScout, a private home room can cost from $9,277 to $10,646 a month.
- Housing: Many people think “I’m set because my mortgage is paid off.” No, not quite. You still need to pay for repairs, homeowners insurance, property taxes, and maintenance. “A retiree will still need to budget for the costs of homeowners’ insurance, property taxes, unforeseen maintenance, etc., even if they have paid off their mortgage,” Patricia Gerould of Zions Bancorporation clarified.
- Taxes: The fact that income may still be taxable is something doesn’t even crosses retirees’ minds. “Withdrawals from retirement accounts, such as IRAs or 401(k)s, are generally taxed as ordinary income, and Social Security benefits may be partially taxable,” Davis stated. “Underestimating the taxes from selling a long-held home is another surprise expense,” adds Tyler End as an additional twist.
- Lifestyle: This covers hobbies, travel, family support, and daily enjoyment. Some people spend more because they finally have the time, but these expenses don’t always decrease. “We have encountered numerous individuals who anticipated a reduction in their expenses, but the truth is that some expenses stay constant while others may even rise,” Davis explained.
Additionally, there are hidden costs, like presents, appliances, eating out, and minor home repairs. Then there are the long-term expenses, which include paid help when everyday tasks become more challenging, transportation assistance, or home modifications (like grab bars or ramps). It’s simple to overlook these expenses because they don’t show up all at once, but then they become urgent.
A simple plan you can actually use
Start by creating a map of your income. Including: Social Security, pensions, and anticipated withdrawals from 401(k) or IRA funds. Next, arrange your spending according to the map. Everybody is different, $60,087 is the average, but your number can be higher if you have complicated medical needs or expensive housing.
There’s other things you can do to help reduce the expenses: think about a smaller house or a place with cheaper taxes and insurance if your place is too big and expensive.
You can also automate the process of saving health. Set aside some money every month for regular care, medications, and premiums and do a review every year. Costs change and your needs may too.
And finally, be realistic but kind. Saying “no” to everything is not the most fulfilling retirement lifestyle; deciding what’s most important and planning ahead will make it all smoother. That’s how retirees can protect their wealth while keeping their peace of mind, and most importantly enjoy the next years.