Your budget changes throughout your life, and retirement is no different. While some expenses might be eliminated, like gas to go to work every day, other costs could rise, like healthcare or new hobbies. And let's not forget inflation, which can increase your overall cost of living.
As you prepare for retirement, it's important to consider all your costs, including ones you might not expect. Here are some of the costs you should consider when calculating your retirement budget.
1. Healthcare Expenses
As we get older, our healthcare needs change, and healthcare costs often get higher.1 While Medicare will cover a portion of your healthcare expenses, you will be expected to either pay for a percentage out of pocket or use private health insurance. There may be unknown variables as well.
In fact, premiums for Medicare have gone up in recent years, to the surprise of many seniors. According to a 2022 analysis by the Center for Retirement Research at Boston College, the median retiree spent $4,311 on medical costs in 2018. Most of that went toward Medicare premiums.2
While you can pay for Medicare premiums out of pocket, you can also prepare for healthcare expenses by contributing to a tax-advantaged health savings account. This can help you cover premiums, as well as any additional charges if you're hospitalized for a long time or you incur fees that Medicare doesn't pay for.
2. Housing Expenses
Housing is one of the biggest expenses in a budget, including when you retire. According to the latest government data, Americans over the age of 65 spend a mean of $20,362 a year on housing.3 While your mortgage may be paid off, you still need to pay for insurance, property taxes and home maintenance repairs. You may also need to pay for help around the house as you get older, such as mowing the lawn, cleaning out the gutters or pruning trees.
There are ways to cut back on housing expenses, such as downsizing your home. Moving somewhere with a lower cost of living can also help you stretch your money further. And if you have a smaller house, you will likely have a lower heating and cooling bill and pay less property taxes.
Another option is to rent. While owning a home can give you more stability, it also comes with increased costs and financial responsibility. Renting, on the other hand, is more flexible. While you'll need to pay a landlord, you won't have to deal with property taxes or paying for maintenance costs. Plus, you'll have the option to move whenever you want if you decide you want to travel for an extended length of time.
3. Daily Living Expenses
Another major expense to factor into your budget is your daily living expenses, such as food and other basic necessities. If retirement is still a long way off, inflation can make it difficult to budget for your daily expenses. The cost of inflation varies each year, so be prepared to make adjustments for the cost of living.
You can also reduce your daily living expenses in retirement. For example, you'll likely have more time to cook and prepare meals at home instead of dining out. While you might be tempted to have long lunches with friends, eating at home will help you keep costs down.
4. Travel and Leisure Expenses
When you retire, you may finally have time to enjoy things that give you joy, such as travel or hobbies. But your budget could limit you. According to the U.S. Bureau of Labor Statistics, retirees over the age of 65 spend a mean of $2,672 a year on entertainment.3
Taking your travel and leisure expenses into account can help you figure out how much you need to retire. With an AARP membership, you can enjoy special savings on hotels and rental cars. You can also find plenty of senior discounts for attractions like museums and movies, as well as free community events at local libraries and senior centers.
And since you aren't working, you can travel during the weekdays and during the off-season, saving you extra money. Plus, there will likely be fewer crowds, making the experience less stressful.
5. Taxes
While you'll get tax breaks as a senior, you'll still need to pay taxes on any withdrawals you make on traditional 401(k)s and IRAs. And you'll need to take out a certain amount after age 72 or face a steep tax penalty.4
Make sure you understand and plan for your tax liabilities when you retire. Take any potential tax-advantaged retirement savings options into account, such as investing in municipal bonds, transferring your accounts into a Roth IRA and leveraging tax credits and deductions.
6. Long-term Care Expenses
One of the biggest mistakes retirees can make is not budgeting for long-term care. As you get older, you may need extra help to meet your personal care needs. That might mean hiring a nurse or cleaner to help you out a few times a week, or moving into an assisted living facility.
Whatever your needs, it's important to plan and budget for them well ahead of time. The costs of long-term care can quickly add up. The monthly median cost for a private room in a nursing home is $9,034, according to Genworth's most recent Cost of Care Survey.5
While it's hard to predict what type of long-term care you'll need (if any), it's wise to be prepared. You can take out long-term care insurance to help cover the costs, or write off long-term medical expenses on your taxes.6
Start Planning for Retirement Today
When planning for retirement, it's important to take all your potential expenses into account, from healthcare and travel to housing and long-term care. Keep inflation in mind, and be prepared to adjust your cost-of-living expenses accordingly.
It's never too early to start thinking about and preparing for retirement. Not sure if you're on track to retire? Check out our retirement savings checklist to find out.
Moriah Costa is a personal finance and investing writer. Her work has appeared in Thomson Reuters, S&P Global, The Washington Business Journal and others.
READ MORE: How Much Should You Save Each Month for Retirement?
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