One of the most important questions asked in the retirement planning process is, “how much money will I spend in retirement?” While it is a short question, the answer can be complicated. You need to factor in your basic living expenses, home maintenance costs, healthcare costs, travel, new car purchase, charitable giving, and much more. And to make matters more confusing, the amount will most likely vary year-to-year!
We've had the pleasure to walk alongside many client families—from those about to retire to those already enjoying their days of leisure. What we've noticed time and again is that folks can miss the mark when estimating how much they'll really spend in retirement. We touch on four of these commonly underestimated expense categories below.
1. Healthcare and Medical Expenses | Unfortunately, some people mistakenly think Medicare will cover all their health care costs once they qualify. The unpleasant truth is that people on Medicare still face plenty of out-of-pocket expenses. Even if you retire in good physical condition, it's probable that your medical expenses will rise as you age. It's crucial for retirees to account for insurance premiums, co-payments, prescription drugs, and other out-of-pocket costs when planning for retirement. Additionally, long-term care, such as nursing homes or assisted living facilities, should also be considered. According to the U.S. Department of Health and Human Services, around 70% of individuals aged 65 or older will require some form of long-term care in their lifetime.
2. Home Repairs and Maintenance | Retirees often underestimate the ongoing costs of maintaining and repairing their homes. Even if you pay off your mortgage, you'll still need to consider various other ongoing housing costs. Expenses such as routine maintenance, roof replacement, AC replacement, and occasional remodels is something that needs to be accounted for.
3. Travel | Many retirees dream of finally traveling the world, spending more time with family, or trying out new activities. Retirement is an ideal time for individuals to explore new places, embark on adventures, and pursue hobbies they've always wanted to try. However, many retirees underestimate the expenses associated with travel and leisure activities. The cost of airfare, lodging, food, and activities can add up quickly. Randy likes to joke that the “Bank of Mom & Dad” is always open, and kids/grandkids have a uncanny ability for clearing their schedule if offered a vacation that Mom & Dad will pick up the tab for!
4. Inflation | Retirees often neglect to consider the impact of inflation on their finances. Over time, living expenses increase, and the purchasing power of money decreases. For those that have been a client for any length of time, you have probably heard Randy or myself talk about the “Rule of 72”. This rule helps you figure out how long it will take your cost of living to double by taking 72 and dividing it by the inflation rate. With 6% inflation, it will take 12 years (72 divided by 6) for your cost of living to double. Inflation in retirement is like a hidden tax!
Underestimating these and other expenses can lead to financial (and emotional!) stress in retirement. Our Live Well Plan, aims to help you identify overlooked expenses so that you can enjoy a fulfilling retirement.
About the Author
Matt Price serves as a Partner and Managing Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their four children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 12 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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