Why your expenses may increase in retirement

When you think of your retirement, you may imagine having your mortgage paid off and your kids out of the house. This would mean two big expenses are now off your plate. And you’ll likely spend less on other things in retirement, too. According to the Bureau of Labor Statistics’ (BLS) Consumer Expenditure Survey, people over 65 years old spend less on clothing, entertainment, alcohol, and pets.¹ For decades, common retirement planning advice has been that you need to have enough retirement savings to replace only 80% of your pre-retirement income. The logic of that advice is that your expenses decline in retirement, so 80% should be enough to maintain your lifestyle in retirement.² But do retirees’ expenses really decline? They may not. While you may spend less on some things, you’ll likely spend more on others.

“One of the biggest myths of retirement is that you will have lower expenses in retirement, when in fact, most often, living expenses will increase as now you have the time to travel, as well as pursue hobbies and interests that you didn't have time to enjoy before when you were actively working,” says Michele Lee Fine, a Guardian Financial Professional and the Founder and CEO of Cornerstone Wealth Advisory. “Pre-retirement, you typically spend more money on a weekend — you go out to dinner, play golf, travel, shop, etc. Every day in retirement is like a weekend.”

What you may spend more on in retirement

According to our research, 27% of retirees are surprised by how high their expenses are in retirement.³ With additional free time, retirees may end up spending more on fitness, travel, and meals out. Retirees are also likely to spend more on charitable giving, moving, and health care.⁴ And health care may be one of the biggest expenses. On average, a 65-year-old today may need to spend $172,500 on health care expenses in retirement.^{5 “}The cost of health care is highly underestimated,” says Fine. “You may have unforeseen medical expenses later in retirement, which are expensive, out of pocket, and have skyrocketed.” Many people may not see these medical expenses coming because they have an expectation that they’ll remain healthy in their golden years. Nearly half of retirees say they thought they’d be healthier or in better physical health in retirement.⁶

Taxes are another area that can surprise retirees. Fine says that can stem from years of being told you’ll be in a lower tax bracket in retirement, but that may not be the case. “Every dollar that's withdrawn from a qualified retirement account is considered taxable income. One hundred percent of it is taxable at ordinary income tax rates. So, even though you're not actively working in retirement and have earned income, every withdrawal from your retirement account will be taxed at ordinary income tax rates, which are one of the many unforeseen expenses in retirement,” says Fine.

Other unforeseen expenses are ones that are hard to even imagine right now because they don’t yet exist. Things change very quickly with technology these days so new products or services may come about in your retirement. “Watching TV used to be free. Now, we have a cable bill to pay, a cell phone bill, devices that are needed or desired. Most people don't consider the countless future expenses there will be that they can't even anticipate now that come at a cost,” says Fine.

Inflation impacts all of these future expenses, making them increasingly more expensive as your retirement continues. “Inflation is like a stealth tax: Although gradual, it has an exponential adverse impact on spending power,” says Fine. “Over time, you start to realize how rapidly the value of your money is eroded with the ongoing impact of higher inflation, prices, and costs.”

How to plan for higher expenses in retirement

Thinking ahead is vital when it comes to retirement planning. You’ll want to decide what kind of lifestyle you want in retirement and then budget for more than you think you’ll need. The top two financial regrets among retirees are not saving enough and not starting to save sooner.⁷

“Making sure you are saving a percentage of your income and earnings during your working years is paramount to building that reserve of liquidity that can service lifestyle, emergencies, and opportunities,” says Fine. Having ample savings can help provide a financial cushion for whatever life throws at you in retirement, whether that’s high inflation impacting the costs of goods and services, medical costs, or needing to support children and/or parents.

It’s also a good idea to get help with your retirement planning. Working with a financial professional can help to ease stress. One-third of retirees with low emotional health regret not working with a financial professional to prepare for retirement.⁸ They can walk you through several retirement scenarios that may play out and help you better prepare for all of them. They can also assess your situation and make recommendations on products that may help make your retirement dreams a reality. You may want to consider asking your financial professional about annuities and other retirement income sources, as they’ll be able to provide education to help you make more informed decisions about your financial planning. The moral is: Retirement is only going to be what you envision, if you plan correctly for it. Simple planning now can help you later to live with less stress and more freedom.