5 Hidden Retirement Costs That Can Drain Your Savings

Retirement is supposed to be cheaper, right? No commute, no office wardrobe, and you’re no longer setting aside part of every paycheck for retirement. But your expenses don’t necessarily go down when you retire. In many cases, they shift. Some of the costs you already have stick around, while others can become more expensive as you get older. Here are five hidden retirement costs that can take a bigger bite out of your savings than you may expect, along with some ways to plan for them.

What’s Changed About the Cost of Retirement?

For a long time, the traditional picture of retirement was pretty straightforward. You worked, raised a family, paid off the house, and retired with many of your biggest financial expenses behind you. For many retirees in the 1950s and 1960s, that picture wasn’t too far off. Mortgages were paid off, pensions provided reliable income, and Social Security helped cover basic expenses.

But retirement has changed. Pensions started declining as 401(k)s became more common in the 1980s. Healthcare and housing costs increased, people started living longer, and many parents found themselves financially supporting their children later in life. These changes have also created more hidden retirement costs to account for. Some of your biggest expenses may still be waiting for you after your final paycheck stops.

1. Healthcare Costs

There’s a common misconception that healthcare becomes free once you qualify for Medicare. You’ll still have out-of-pocket healthcare expenses in retirement. You may need to pay Medicare Part B and Part D premiums, along with deductibles and copays. You may also choose a Medicare supplemental policy, sometimes called a Medigap policy, to extend your coverage and help limit some of those out-of-pocket costs. These expenses can add up over a long retirement. A married couple could potentially spend more than $300,000 on healthcare costs throughout retirement.

It’s also worth working with a Medicare professional when you’re choosing coverage. If you’re considering Medicare Advantage, check whether your preferred doctors are covered. Some plans may limit out-of-network providers.

Watch Your Income for IRMAA

Your income can also affect your Medicare premiums. IRMAA, or the income-related monthly adjustment amount, is an additional charge that applies to Medicare Part B and Part D premiums when your income exceeds certain thresholds.

The important thing to understand is that these thresholds work like cliffs. If your income goes $1 into the next IRMAA bracket, you can be responsible for the entire additional Medicare surcharge for that bracket. For some retirees, IRMAA may be impossible to avoid altogether. But watching your income can help you avoid crossing into the next bracket unnecessarily.

Consider Building Up Your HSA

If you have access to a health savings account before retirement, you may also want to consider maximizing it. HSA contributions can go in pre-tax. Depending on your plan, you may be able to invest the balance and allow it to grow tax-free. You can then take money out tax-free for qualified healthcare expenses. You can also carry the balance into retirement. Many of our clients who funded an HSA before retiring feel much better knowing they have money set aside for future healthcare costs.

2. Housing Costs

A lot of people make paying off their mortgage before retirement a priority. Whether that makes sense depends on your individual financial plan. Even if you enter retirement without a mortgage, your house still costs money. Housing costs in retirement can include maintenance, repairs, property taxes, homeowners insurance, utilities, and other ongoing expenses.

Let’s look at a $750,000 home. If we estimate annual maintenance, repairs, and upkeep at 2% of the home’s value, that’s about $15,000 per year.

Now add approximately:

$3,750 for property taxes
$5,000 for homeowners insurance
$5,000 for utilities, including electricity, gas, water, garbage, internet, and cable

Altogether, that’s about $28,750 a year just to maintain the home and keep everything running. And that’s before you buy groceries, go out to dinner, take a trip, or spend money on anything else. For some retirees, those housing expenses alone could take up most of their Social Security income.

These costs should also be adjusted for inflation when you’re putting together your retirement projections. A $5,000 expense today may look very different 10 or 20 years into retirement. Leaving these costs out can make your expected retirement costs look much lower than what you may actually spend.

3. Taxes

Taxes in retirement are another expense that doesn’t go away. Different sources of retirement income can push you into higher tax brackets, especially as more income sources begin. If you have a pension, Social Security, and required minimum distributions, those income sources can add up. Without planning ahead, you could end up paying more in taxes than you expected. Higher income could also push you into one of the IRMAA surcharge brackets and increase your Medicare premiums.

Plan Before Required Minimum Distributions Begin

If you retire before required minimum distributions begin at age 73 or 75, you may have several years to consider different retirement tax planning strategies. Depending on your situation, you could use Roth conversions or take early withdrawals from your IRA during those years. Both can help reduce the amount left in tax-deferred accounts before RMDs begin. Waiting until your pension, Social Security, and RMDs are all coming in could leave you with more taxable income later. Planning during the years before RMDs begin may help reduce your overall tax liability and lower the chance of moving into a higher tax bracket or IRMAA bracket.

4. Family Support

Another unexpected retirement cost often missing from the original plan is helping family. That could mean helping your adult children, supporting aging parents, or providing money for your grandchildren. An adult child may lose a job, go through a difficult financial period, or face another unexpected retirement cost. Occasional help may not significantly affect your retirement plan. Providing support year after year is different.

Let’s say you give your adult children $20,000 a year for 25 years. Over that period, you’ve provided $500,000 in financial support. That doesn’t mean you can’t help your family. Depending on your net worth, spending needs, and other plans, that may be completely manageable.

But if helping your family is important to you, include it in your retirement planning. Sometimes that could mean working a couple of extra years or adjusting another financial commitment that isn’t as high a priority. You may also need to set boundaries around how much support you’re comfortable providing. Planning for it gives you a better idea of how much you can give without compromising your own retirement needs.

5. Lifestyle Inflation

Lifestyle inflation is a little different from lifestyle creep. Lifestyle creep often happens during your working years, as your income increases and your spending gradually follows. Lifestyle inflation in retirement can happen because you suddenly have something you didn’t have while you were working full-time. A lot more free time.

That free time can mean more:

Dining out
Hobbies
Home renovations
Travel

Plan for Your “Go-Go” Years

Retirement lifestyle costs can add up quickly, especially if you plan to spend more during the first several years after you stop working. Maybe you want to travel much more during your early retirement years when you have the time and energy to take the trips you’ve been putting off. If that’s how you picture retirement, plan for it and see if it works. Your spending doesn’t have to remain exactly the same every year. You can build higher travel and lifestyle expenses into those early retirement years and see how they affect the rest of your financial plan. That way, you’re including the retirement you want to live in your retirement planning instead of being surprised when those expenses come up.

Plan for the Retirement You’ll Actually Live

Healthcare, housing, taxes, family support, and lifestyle expenses are all hidden retirement costs that can take up more of your income than you initially expect. Accounting for these retirement costs ahead of time gives you a more realistic picture of what your retirement may cost and whether your savings can support the lifestyle you have in mind.

At Paces Ferry Wealth Advisors, we help clients build financial plans around how they expect to spend, where their retirement income will come from, and the expenses that may change along the way. If you’d like help with your retirement planning, contact us to schedule a conversation.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.

Zachary Morris, CFP®

Having traveled to over 35 countries, Zach is a believer in Ralph Waldo Emerson’s statement that Life is about the journey, not the destination. Being a CERTIFIED FINANCIAL PLANNER™ provides Zach the opportunity to help clients define and realize their journey, and co-founding Paces Ferry Wealth Advisors, an independent firm, allows the freedom to define the client experience along the way.