I officially retired at the age of sixty-one in the summer of 2021 after a rewarding career of four decades. Since retiring, many of my expenses have gone down.
I no longer have to spend money on retirement savings. Commuting costs and expensive suits related to office work are also completely gone.
That’s the excellent part. The not-so-excellent part is that not all of my expenses disappeared after I retired. Some even went up!
To plan for a successful retirement, it’s crucial to have a general idea of what your spending needs will be when you retire.
In this post, I will discuss the expenses you must consider in your retirement planning.
When my wife & I retired in 2021 from our busy jobs (she was a Pathologist, and I was a Finance Executive), we sold our Illinois condominium. We moved back to the East Coast during the summer to be closer to family and friends. We downsized to our 950-square-foot condominium in Philadelphia, which we bought in 2012, knowing we’d move there once we retired.
While our mortgage was paid off (thank goodness!), we still pay insurance, real estate taxes as well as a hefty HOA (Homeowners Association fees). In our third year living in a city environment, our HOA has increased to just above $1,000 a month.
Whether or not you plan to retire mortgage-free, consider housing in your anticipated expenses. If you plan to have no mortgage payments in retirement, keep in mind that expenses, including property taxes, insurance, and home repairs, will remain.
Healthcare costs are a significant concern in retirement as they increase faster as we age. It particularly scares me the most as I come from a family with a history of heart disease, and my wife experienced Stage 2 breast cancer in 2018. I am currently on medication due to meeting two of the three key risk factors for heart disease. Unlike the famous song by Meat Loaf from the 70s, this is when two out of three IS bad!
Medicare premiums kick in at age 65. They can be VERY confusing with the various coverages designated by letters.
The good news is that most retirees do not pay a premium for Medicare Part A hospital insurance. Medicare Part A has a $1,600 deductible in 2023 if you are hospitalized, and there are additional coinsurance charges if your hospital stay exceeds 60 days.
Medicare Part B medical insurance charges a standard premium of $165 in 2023, and most of us as high-income retirees, will pay an additional premium. Medicare Part B also has a $226 deductible in 2023. After that, you will be expected to pay 20% of the Medicare-approved amount for most of the medical services you use unless you purchase another insurance plan to supplement traditional Medicare.
Medicare Part D prescription drug plans charge a separate premium that varies depending on the method you select each year.
There might also be a third premium if you choose a Medigap plan that will pay some of your out-of-pocket costs related to Medicare. My advice: talk to a Medicare planner, which I plan to do next year when I turn 65.
Finally, if you plan to retire before 65, make sure to plan for healthcare with rising costs, and inflation rates in mind.
Taxes are a pain in the butt even after we retire. After years of deferring taxes, you will need to pay income tax on each withdrawal from your traditional 401(k)s and IRAs.
Keep in mind that the advantage of Roth 401(k)s is that you can withdraw them tax-free in retirement.
Based on ever-changing rules, don’t forget that “Required Distributions” from tax-deferred retirement accounts are required after age 73 to avoid a stiff 25% tax penalty.
Also, remember that a portion of your Social Security benefit could also be taxable based on your level of retirement income.
Food is a key decision point in retirement.
One avenue is that you can save money on food in retirement if you are willing to give up expensive convenience foods and take the time to cook healthy meals at home.
My wife and I have decided that we are going to enjoy retirement by experiencing the amazing restaurant scene in Philadelphia. Thus, we are eating out more often than when we worked and spending more money on food than initially planned.
We have discovered that going to early dinner “happy hours” or not ordering alcohol with our meals are excellent ways to save money on food.
Emergencies do NOT go away in retirement.
In the past year alone, we have had several large repairs to maintain our older vehicles in addition to household repairs to replace leaking windows and older kitchen appliances. An emergency fund is essential to avoid spending your savings faster than envisioned.
Like many financial experts, I recommend at least 3-6 months of living expenses. This calculation is much easier if you use some form of budgeting.
My wife and I have used an app appropriately named “You Need a Budget” (YNAB) for the past ten years. This app allows us to enter a transaction quickly on our cell phone and see how much money is remaining in any expense category. We can also run month-end reports which reflect how we are performing to our monthly budgeted targets.
Entertainment opportunities abound when you retire.
Your newfound free time in retirement provides opportunities to try new activities, but those can get expensive. Fortunately, deals for seniors abound, such as discount admission to museums and movies, and some colleges offer low or no-cost classes for retirees.
Many communities provide plenty of free or affordable entertainment to people of all ages, ranging from summer concerts to library seminars, and senior centers often provide social activities just for retirees.
One of my favorite things about retirement is spending more time with my wife. After decades of devoting substantial amounts of time due to our careers, we love discovering new offerings in our large city of Philadelphia.
We love walking to numerous city sites, such as the excellent restaurant scene (refer to #4 above), sporting events on Broad Street (GO Phillies & Eagles!), and concerts and other world-class performances at the beautiful Kimmel Center, which is only one block from our condominium.
We also have been able to enjoy the outdoors by bicycling as well as picking up our new retirement sport of pickleball, which is a racket or paddle sport that combines elements of tennis, badminton, and ping pong. When gas prices rose dramatically in 2022, we were able to stay young by walking more often and joining various group functions such as walking food and history tours.
Travel is something we all dream about when we are thinking of life in retirement. Retirees finally have time to travel as much as they want, as the key limiting factor is your savings. Senior citizens (and particularly, AARP members) often enjoy discounts on hotels and rental cars. There are also creative ways to travel affordably if you are willing to stay with friends or swap homes with someone else. Retirees have the advantage of being able to travel during weekdays and off-peak times, which could save you money on airline fees and hotel stays while helping you avoid crowds.
My advice is to set a date to fulfill your dream vacation.
For example, my wife and I enjoyed a dream vacation to Hawaii during our initial year of retirement in 2021. Last year, we completed a ten-day guided tour to four Canadian cities in the fall of 2022 with eleven interesting and delightful couples from across the U.S., which was a wonderful and fun-filled vacation adventure.
YES – it was expensive but well worth it!
If you’re an early retiree, you may have yet to put your kids through college. If you plan to help them pay for college, make sure to plan ahead by funding 529 Plans or by assisting them in applying for financial aid.
If you have kids in elementary or high school, you may live where private schools are commonplace and a borderline necessity. Those are some expensive years!
Even if your children have completed all the paid education or if you don’t have children, you may still want to set some money aside for education.
With time on your hands, the desire to learn something new may be more vital than ever. You may want to learn new skills and choose to buy some education via community ed, community college, or possibly pursue a full-fledged degree at a university.
Legacy is something we need to think about in retirement.
Some retirees would like to leave financial gifts to their children, grandchildren, or other heirs or pass on treasured items such as jewelry, furniture, or other heirlooms.
Think about whether you plan to include any charitable giving to meaningful causes. Make sure your wishes are clearly written so that your plans can be realized. My wife and I have recently collaborated with our financial advisor to create both an estate plan for charitable giving as well as an Irrevocable Life Insurance Trust (ILIT), which ensures that the benefit from an insurance policy can avoid the dreaded estate taxes as well as fulfill our wishes to share the proceeds with family members.
Aiding family members seems like a great idea as you settle down in retirement…but be careful. Looking at the nest egg you have built up over your working years, it may seem that you have enough funds to support more than just your household.
If you have done well at setting aside money to last for many years, do not be surprised if family members request a loan or financial help. You may be asked to help grandchildren pay for their college education or to provide money for adult children to make a down payment on a house. With current mortgage rates as high as 8%, family members may need additional funds to qualify for a mortgage.
Before sharing funds with other family members, it can be helpful to review your budget or discuss it with your financial advisor. While my wife and I are certainly willing to help other family members in need, we do so with discretion and in alignment with our monthly/annual budget constraints. Also, we have shared the ILIT concept with family members to make them aware of our estate planning concepts that will impact them upon our death.
While many Americans look forward to having more free time in their retirement years, some find themselves in a gloomy situation they were not expecting.
Overspending, a lack of planning, and financial missteps can quickly make the retirement dream a nightmare. Per my analysis of my budget reports (using the app YNAB discussed above in item #6), my wife and I are spending about 5% more than we had anticipated.
There are valid reasons for this overage, as in our retirement, we are eating out more often, enjoying nearby shows and concerts, attending more sporting events with local teams making championship runs to the World Series and Super Bowl, and dealing with the past year in which we experienced the highest inflation in over forty years.
My final piece of advice after this sobering article on expenses that need to be considered in retirement is two-fold:
- Planning is the key to a successful retirement.
- Enjoy retirement as it is a six-month holiday twice a year!