10 Expenses Retirees Often Overlook Before Retirement

If only retirement could actually be the carefree lifestyle highlighted on television commercials. Sure, you may get to walk on the beach at sunset occasionally, but you still have to deal with life's more mundane tasks like getting oil changes and hiring someone to repair your leaky roof. Those tasks and their associated expenses can easily be overlooked when you're thinking about your ideal retirement lifestyle.

Unfortunately, overlooking any expense in your retirement budget raises the chance that your post-work lifestyle will fall short of expectations. Avoid that fate by making sure your retirement plan considers these 10 living expenses.

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Many prospective retirees don't know that withdrawals from a 401(k), 403(b), 457 plan, and traditional IRA are taxed as regular income. Pension income and Social Security benefits are often taxable, too. You'll also owe taxes on any interest and investment income generated outside your tax-advantaged retirement accounts. That includes the money you make on bank CDs and high-yield savings accounts.

If you expect your retirement income from all sources to be about the same as your working income, your tax bill each year should be the same, too. Reference your recent tax returns to guide you on what your annual tax budget should be.

If you think you'll make less money in retirement, you may end up in a lower tax bracket. And that would translate to a smaller annual tax bill.

ALSO READ: 3 Tax-Saving Opportunities You Must Know

While you probably qualify for premium-free hospital insurance from Medicare, you'll still incur premiums for your medical insurance and prescription drug coverage. Those coverages come in the form of Part B and Part D plans, or you might opt for a Medicare Advantage Part C plan instead. Part C plans have their own premiums, but they're usually in addition to your regular Part B premiums.

The Medicare Part B premium in 2020 ranges from $144.60 to $491.60 monthly, depending on your income. You'd qualify for the low end of that range if your income is less than $87,000 for single filers or $174,000 for married filers. Part C and D plans have varying premiums, but the monthly average for these in 2020 is $36 and $42, respectively.

Medicare premiums are the predictable portion of your out-of-pocket healthcare expenses. The other stuff, primarily copayments and coinsurance, are much harder to forecast. They'll fluctuate based on the type and frequency of the services you need, as well as the copay and coinsurance rules of your specific Medicare plan.

A 2017 study by Boston College found that retirees spend, on average, about $1,300 annually on out-of-pocket healthcare costs over and above their premiums. Your costs may be less if you are healthy and more if you are not. If you aren't sure what to budget, err on the side of a higher number. When it comes to healthcare costs, it's better to be conservative.

Medicare Part A and Part B do not cover dental and vision exams, dental procedures, or glasses and contact lenses. You do have the option to purchase dental and vision insurance through a private insurer. Additionally, some Medicare Advantage plans also offer these benefits.

There are two ways to get a sense of your future dental and vision care costs. You can shop around for senior dental and vision care plans, comparing premiums and the costs of covered services. You can also contact your current dentist and optometrist and ask for their cash rates on common procedures -- in the event you'd want to skip the insurance and pay for these services directly.

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Another consideration is the cost of long-term care, which also isn't covered by Medicare. Admittedly, it's tough to budget for expenses you don't know if you'll need, especially when those expenses could add up to $100,000 annually.

Start by evaluating the likelihood that you'll need long-term care. Many conditions that require full-time care are hereditary, such as Alzheimer's. A review of your and your spouse's family history could sway you to plan for long-term care costs, or not.

If you are worried about these expenses, there are ways to prepare. Two solutions are long-term care insurance and life insurance with a long-term care rider. These products are pricey and not right for everyone, so proceed only after a thorough review of the pros and cons.

ALSO READ: Your Guide to Long-Term Care Insurance

If all goes well, your retirement could last for 30 years or more. And a home can experience lots of wear and tear over the span of three decades. You might need new appliances, plumbing or electrical upgrades, or a new roof.

Failing to budget for these can be problematic when you're on a fixed income. Large expenses either have to be financed or paid out of your savings. New financing obviously increases your cost of living, but pulling money from your savings reduces your ability to produce income going forward.

Even if you don't pay much in home repair costs today, budget 1% to 4% of your home's value for future upkeep costs. It's wise to deposit your budgeted amount into a designated account each month or quarter and let it accumulate until you need it.

Cars, like homes, need ongoing maintenance. At a minimum, you'll face oil changes, battery and tire replacements, and brake repairs. You can estimate your car maintenance costs by looking back at your bank statements to add up what you've spent in recent years. It may also be helpful to know that, according to the American Automobile Association (AAA), new car owners spend $1,186 annually on maintenance.

Even when you keep up with the maintenance, your car will probably reach the end of its useful life during your retirement years. That means you also need a plan for replacing your vehicle at some point.

In the early days of retirement, you might be happy reading books and taking leisurely walks around the neighborhood. But boredom can set in quickly and, over time, lead to anxiety and depression. There are a variety of ways to head off boredom in retirement. Some of them, like working part-time, will make you money. Others, like traveling, will cost you money.

Be realistic in your retirement budget about your entertainment needs. You don't need to take world cruises, but you will appreciate the occasional movie, sports event, or nice meal out. Experts recommend budgeting 5% of your income for entertainment. You can start your budget with that number and adjust it to suit your situation.

If you plan to pay off your mortgage before retirement, it's easy to assume the entire payment goes away -- but that's not usually the case. Paying off your mortgage only eliminates the principal and interest portion of your payment. You still have to cover other included items, such as property taxes, homeowners insurance premiums, and, possibly, your homeowners association fee.

Take a look at the escrow statements provided by your mortgage lender to identify any other expenses included in your payment, and then budget accordingly.

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Inflation erodes the buying power of your retirement income each year. In recent years, inflation has been about 2% annually. If your budget in the first year of retirement totals $100,000, you'll need $102,000 the next year and $104,040 the year after that -- just to avoid a lifestyle downgrade. In 20 years, your required income grows to nearly $150,000.

Make sure your retirement budget includes those annual step-ups for inflation. You can also reduce your inflation risk by investing in growth stocks, which tend to outpace inflation, and inflation-adjusted securities like TIPS (Treasury Inflation-Protected Securities).

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You're more likely to enjoy that carefree retirement lifestyle when you have a solid and complete budget for your living expenses. As you start crunching numbers, make sure to address:

1. Taxes
2. Medicare premiums
3. Healthcare copayments and coinsurance
4. Dental and vision care
5. Long-term care
6. Home maintenance
7. Car maintenance and replacement
8. Travel and recreation
9. Property taxes and homeowners insurance
10. Inflation

If you have plans in place to cover these, you'll do a better job managing your cash and your stress level in retirement.

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