4 Expenses That Could Go Up in Retirement

April 21, 2022

Once you enter retirement, you may not spend as much as you did while you were working. Even if you spend the same amount as you did while working, you would not need to replace 100% of your pre-retirement income, as you no longer need to save for retirement (and you may be entirely debt-free with a paid-off house, which means you could need even less). Generally accepted income replacement ratios in retirement range from 60% to 80%; maybe a little less if you are retiring early, or more if certain expenses are higher for you in retirement. Types of expenses that might be higher in retirement vary from person to person, but there are several big ones you need to keep an eye on.

1. Healthcare

The average American age 65 and older incurs $11,316 worth of medical expenses every single year. Many, or hopefully most, costs will be covered by Medicare or a Medicare Advantage Plan (or private insurance, if you retired before reaching Medicare eligibility). Medicare doesn’t cover everything, including some big expenses like vision, dental, and hearing, and a Medicare Advantage Plan won’t cover everything, either. One reason why medical expenses are getting higher in retirement is because we are living longer and longer. Most of us can plan on being retired for decades, which is great! However, this means you will likely need to plan for more medical expenses in retirement than previous generations.

Those retiring before Medicare eligibility will need to plan for spending even more on healthcare. Health insurance outside of an employer can be very expensive, and going without health insurance could be even more expensive. Planning to pay for healthcare on your own, without help from your employer or Medicare, can be very scary. At the end of the day, though, it is just an expense that can be planned for like any other kind of expense.

Once you reach your 50s, it would be wise to start planning for future long-term care you might need, and consider whether or not you have a need for long-term care insurance. About 70% of us will require long-term care services at some point, and the average stay in an assisted living facility is a little over two years. It is important to plan for these expenses before you need the money so your loved ones don’t end up scrambling to figure out how to pay for the care you need.

2. Travel

Nobody enjoys planning for what could be a massive amount of medical expenses in retirement and end-of-life care, but travel planning can be much more fun! With children now grown and out of the house and no more 9 to 5, retirement is when you can finally travel where you want, how you want, and when you want. That is, if you planned for those expenses before retirement.

Almost all Baby Boomers, 99%, said in a study that they planned to travel for leisure each year, taking about four to five trips. 47% plan to travel internationally, with the average Baby Boomer spending about $6,400 per year on travel. It is reasonable to expect travel expenses to go up in retirement, and they should; travel can be a great way to experience new cultures, places, and people that you may not have had an opportunity to while working.

3. Charitable contributions

Older Americans are the most generous group in the country. Those born before 1964 account for almost 70% of all charitable giving in the U.S., and retirees are much more likely to define success by how generous they are rather than by how much wealth they accumulated. Planning for those charitable contributions before retirement can help ensure you are on-track to accomplish your charitable goals, whatever they may be.

Not only can giving to charity help make the world a better place, there are also strategies you can employ to maximize the benefits the charity and you receive. Charitable giving accounts allow you to donate appreciated holdings directly to your preferred organization, which can reduce your tax burden (don’t worry, the tax burden doesn’t shift to the charitable organization; nonprofits are generally exempt from tax).

Only contributing to charitable organizations every other year may make sense if your amount of annual contributions are below the standard deduction. This stacking strategy allows you to maximize the tax savings, and, when coupled with a charitable gift fund, you can smooth your charitable distributions over the full 24 months so that charities do not do without.

Another strategy to maximize charitable contributions are qualified charitable distributions. This involves sending required minimum distributions directly to charity, which maximizes tax benefits for you and helps your preferred charity. Check out the clip from the show below where Brian explains QCDs.

4. Economic outpatient care

Even though your adult children have almost certainly left the nest by the time you retire, they could still be financially dependent on you. 22% of all adults receive financial support from their parents, and younger adults receive support at an even higher rate. Setting clear boundaries with your children while they are still under your roof can help them become financially independent adults when they move out. Make sure they know what to expect, as far as financial support, so they know what they will be responsible for and not to ask for more. It probably wouldn’t hurt to introduce them to The Money Guy Show early in life, either.

Financial support between parents and children isn’t a one-way street, and you don’t want to end up on the other side of the equation. 21% of Americans currently provide financial support to their parents. As detrimental as providing excessive financial support to your adult children can be, draining them of resources while their dollars are still extremely powerful if saved for retirement can be just as harmful.

Expenses in retirement can vary wildly depending on your goals and financial situation. Some expenses, like a mortgage payment, may go away entirely in retirement. Others, such as those above, may increase in retirement. Once your retirement portfolio reaches a critical mass, it may make sense to connect with a fee-only financial advisor and start planning how those expenses will be allocated to accomplish your retirement goals, paying for your kids’ education, estate and legacy planning, tax planning, and more.

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