10 Expenses Retirees Often Overlook Before Retirement

Author: Katie Brockman | August 11, 2020

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Planning for retirement is hard work

There's a lot that goes into preparing for retirement, and there are loads of expenses you'll have to consider. You'll need to think about general living expenses, for example, as well as whether you plan to move in retirement. It's also important to consider significant expenses like travel or entertainment since you'll have a lot more free time as you get older. But there are several costs you may be overlooking, and these are the ones that could potentially break the bank in retirement.

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1. Healthcare

The average retiree spends approximately $4,300 per year on out-of-pocket healthcare costs, according to a report from the Center for Retirement Research at Boston College. Even if you're enrolled in Medicare, you could potentially spend thousands of dollars per year on out-of-pocket costs including premiums, deductibles, copays, and coinsurance. While you may not be able to predict exactly how much you'll spend on healthcare, leaving some room in your budget can ensure these costs don't take you by surprise.

ALSO READ: A Bill in the Works Could Help Seniors Avoid Costly Medicare Mistakes

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2. Long-term care

Around 70% of today's 65-year-olds will need long-term care at some point in their lives, according to the U.S. Department of Health and Human Services. It's not cheap either, with the average semi-private room in a nursing home costing more than $6,800 per month -- or nearly $82,000 per year. Because there's a good chance you'll need long-term care in the future, it's smart to start planning now. That could mean setting aside a good chunk of change in your retirement fund to account for these costs, or you may choose to enroll in long-term care insurance to reduce your out-of-pocket expenses.

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3. Retirement account taxes

If you're investing in a 401(k) or traditional IRA, you may owe income taxes when you start making retirement account withdrawals. Exactly how much you'll owe will depend on your tax bracket and where you live, but if you're not budgeting for taxes at all, they can take a bite out of your savings. In addition, you'll need to ensure you're taking required minimum distributions (RMDs) on time. If you have a 401(k) or traditional IRA, you're required to start withdrawing your cash at age 72. If you don't withdraw as much as you should or if you skip your RMD altogether, you'll face a tax penalty of 50% of the amount you were supposed to withdraw.

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4. Social Security taxes

Not only could your retirement savings be subject to taxes, but your Social Security checks could be taxed, too. Whether or not your benefits will be taxed depends on where you live and how much you're earning. Each state has slightly different rules regarding how benefits are taxed, so check your local tax laws to see if and how much taxes will affect your benefits. With federal taxes, how much you're taxed will depend on what's called your “combined income” -- which is half your annual benefit amount plus all other sources of income (excluding Roth IRA withdrawals). If your combined income is higher than $25,000 per year (or $32,000 per year for married couples filing jointly), you'll owe federal taxes on a portion of your benefits.

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5. Inflation

While it's technically not an expense that you can add to your budget, inflation can have a major impact on your retirement savings. You could spend at least a couple of decades in retirement, and thanks to inflation, your current savings won't have the same buying power in the future. So while your retirement fund may look healthy in today's dollars, your money may not go as far as you think in retirement. As you're saving, be sure to factor inflation into your plans to ensure your money lasts as long as you need it to.

ALSO READ: Can Social Security Really Keep Up With Inflation?

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6. Unplanned emergency costs

Unexpected expenses don't go away once you retire, so it's crucial to make sure you have a healthy emergency fund. In fact, it may be even more important to have a stash of emergency savings in retirement. Because you'll be living on a fixed income, it may be more difficult to replenish your emergency fund if you face an unplanned expense. Then if your rainy day fund runs dry, you may need to take more than you'd planned from your retirement fund. By ensuring you have a well-stocked emergency fund by the time you retire, your retirement savings will last longer, too.

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7. Home maintenance

Homeowners of all ages have to budget for routine maintenance, but retirees may have additional costs to consider. As you get older, it may become more difficult to perform certain maintenance duties, such as mowing the lawn, raking leaves, or cleaning the gutters. Unless you have a generous family member or neighbor willing to take care of these tasks for you, you may need to hire someone to help. By budgeting for these expenses now, they won't break the bank later.

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8. Age-related home renovations

As you age, you may need to update your home to fit your needs. If you're unable to climb the stairs, for example, you may need to install a stairlift or convert one of your main floor rooms into a bedroom. If you require a wheelchair, you might need to build a ramp to get in and out of your home. Of course, it can be difficult to plan for these expenses ahead of time when you don't know exactly how your living situation might change, but it never hurts to start thinking about these costs now so you're not blindsided by them down the road.

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9. Care for parents and/or children

Some retirees may be at the age where they have to care for aging parents as well as adult children, which can take a toll on your budget. This can be especially tough if your senior parents require long-term care and you're footing the bill, or if you're funding your children's college tuition. Consider how much you can afford to help family members while still saving for retirement, and try to budget for those costs the best you can.

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10. Longevity

This is another cost that won't be a line item in your budget, but it is important to prepare for it. The average life expectancy is 78.6 years old, according to the Centers for Disease Control and Prevention, but some retirees may live far longer than that. You may not be able to predict exactly how long you'll live, but take an honest look at your health and your family history. If you have reason to believe you may live a longer-than-average lifespan, it's important to start planning accordingly to ensure your savings last as long as possible.

ALSO READ: 4 Ways to Prepare for a Longer Retirement

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Retirement comes with a hefty price tag

It can be tough planning for retirement when there are so many expenses to consider, but the more thoroughly you prepare, the better off you'll be in your senior years. By taking into account every cost you can think of, you can avoid getting caught by surprise with an expense you overlooked.

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