7 Overlooked Retirement Expenses When Planning - 401k Maneuver

7 Overlooked Retirement Expenses When Planning

When thinking about retirement, most people’s minds drift to a dream life involving no work, vacations, and finally getting to enjoy their favorite hobbies.

However, several overlooked retirement expenses may prevent you from doing any of this during retirement. 

The disconnect between what people believe they need to attain their retirement lifestyle and what they can actually afford is often the result of overlooked retirement expenses during planning, such as supplemental Medigap coverage and new state taxes.  

For example, an HSA Bank survey found “two-thirds (67 percent) of consumers believe they will need less than $100,000” for healthcare expenses.¹ 

And Fidelity reports, “The average couple will need $295,000 in today’s dollars for medical expenses in retirement, excluding long-term care.”² 

Discrepancies like this are representative of overlooked retirement expenses that catch people off guard. 

Don’t make the same mistake. Consider the following 7 overlooked retirement expenses as you plan your financial future. 

#1 Healthcare Expenses

overlooked retirement expenses

There is a big discrepancy between how much money people think they will need for healthcare and how much they actually need.

Unfortunately, many mistakenly believe their healthcare will be covered by Medicare. When, in reality, they will need a good deal more to cover supplemental coverage and out-of-pocket expenses.

overlooked retirement expenses

Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity, explains, “Health care is creating a ‘retirement cost gap’ for many pre-retirees.”⁴ 

Keep in mind the $295,000 figure does not factor in long-term care or inflation.

Ultimately, your individual healthcare expenses will vary depending on…

  • How healthy you are.
  • When and where you retire.
  • How long you live.
  • Your tax rates in retirement. 
  • How you pay for medical expenses.

Even if you enter your retirement years healthy as a horse, you don’t know for sure what the future holds.

That’s why it’s better to over-prepare for healthcare in retirement rather than struggle to afford medications and treatment. 

#2 Medicare

overlooked retirement expenses

Medicare is one of the most overlooked retirement expenses since many assume it’s all they’ll need for health insurance. This is not the case. 

For example, if you retire early, you will need another form of health insurance since Medicare doesn’t kick in until 65 years of age.

Plus, Medicare isn’t free like some believe. You may have to pay a monthly premium based on income.  

The most basic Medicare plan does not cover certain out-of-pocket costs such as deductibles, copayments, and supplemental insurance..

These things add up. Quick. 

There are four different parts of Medicare (A, B, C, & D) that you can opt to enroll in; however, each covers different things.

For example, unless you opt for Medicare Part D, medications will not be included.

Additionally, Medicare doesn’t cover other overlooked retirement expenses, including dental, vision, or hearing aids.

Some retirees can buy a supplemental Medicare health insurance policy, known as Medigap, to cover some of these other expenses.

But again, this costs, and is another overlooked retirement expense, so consider these costs when planning.

#3 Long-Term Care

overlooked retirement expenses

The U.S. Department of Health and Human Services estimates, “Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years.”⁵ 

And long-term care isn’t cheap.

Genworth, a long-term care insurer, recently published the Cost of Care Survey, conducted by CareScout®.⁶ 

According to their report, “From 2004 to 2020, the cost for facility and in-home care services has risen on average from 1.88% – 3.80% per year. That’s an increase of $797 annually for home care and up to $2,542 annually for a private room in a nursing home.”⁷ 

Look at these figures from the report for a better understanding of why long-term care is one of the most commonly overlooked retirement expenses:

  • A private room in a nursing home in 2020 averages $105,850 annually.
  • An assisted living facility in 2020 averages $51,600 annually.
  • A home care health aid in 2020 averages $54,912 annually.

According to a recent survey by MoneyRates, “Many may be underestimating their retirement living expenses by failing to properly account for inflation and the cost of elder care facilities. […] 71% of those within 20 years of retirement have not researched costs of nursing home or assisted living facilities.”⁸ 

If you have not purchased long-term care insurance or planned for long-term care, you (or your adult children) may end up footing the bill.

#4 Taxes

overlooked retirement expenses

Many retirees plan to retire in a new state, such as retiring somewhere warmer or closer to the grandkids.

When planning, make sure you account for changes in taxes should you plan on moving. 

Most states tax some portion of retirement income, and some states tax a good bit. For example, should you choose to retire in a state like New York or California with high income taxes, you will need to prepare to save a lot more for retirement.

Currently, 12 states in the U.S. do not require retirees to pay tax on any 401(k), IRA, or pension income.⁹ 

If you plan to move during your retirement years, these are the states where you won’t pay taxes on your retirement income:

  • Alaska
  • Florida
  • Illinois
  • Mississippi
  • Nevada
  • New Hampshire
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Don’t forget that you may owe federal taxes on your Social Security benefits depending on your combined income. 

The Senior Citizens League reports, “Half of retirees report paying tax on Social Security benefits for 2019.”¹⁰ 

#5 Transportation

overlooked retirement expenses

While you may not have to commute during your retirement years, you will likely still have a vehicle.

Even if you have paid your car off, you will still have to pay for its upkeep and car insurance.
As a result, transportation costs are another overlooked retirement expense.

In a report from the Bureau of Labor Statistics, they report the average annual transportation costs in 2019 was $10,742 (with $4,394 for vehicle purchases and $2,094 for gasoline and other fuels and motor oil).¹¹ 

When planning for retirement, you may want to consider becoming a single-car family. Or moving to a location that’s pedestrian friendly. 

#6 Household Expenses and Upgrades

overlooked retirement expenses

One of the overlooked retirement expenses that surprises retirees is household costs.

While your housing payments may drop during retirement, you still have to find a way to cover the costs of maintenance and upgrades.

Household expenses you could easily afford while working, such as air conditioning repair, may be much more difficult on your retirement budget.

Additionally, you may become physically unable to do repairs or yard work yourself and may need to pay someone else to complete these jobs for you.

Another consideration is upgrading your home to meet your aging condition.

A 2018 AARP survey found, “3 out of 4 adults age 50 and older want to stay in their homes and communities as they age.”¹² 

This practice, known as aging-in-place, requires homes to be renovated to meet the needs of senior citizens, such as adding ramps or making bathrooms safer. 

This is why it is important to also consider household expenses during retirement planning.

#7 Adult Children and Grandchildren

overlooked retirement expenses

As much as you want to help out your adult children and grandchildren, you may be hurting your financial future by doing so. And putting your retirement savings in jeopardy. 

If you have not carefully considered how much money you need for retirement and how much you can afford to spend on your family, you may be shocked by this overlooked retirement expense.

According to Merrill Lynch, “79% of parents with adult children provide some financial support for their living expenses both large and small, from weddings to phone bills.”¹³ 

Specifically, parents of adult children contribute “a total of $500 billion annually, or twice what they put into their own retirement accounts.” 

Here are some of the expenses retirees are helping their adult children with:

  • Groceries/food ($54 billion annually) 
  • Cell phone service ($18 billion annually)
  • Housing
  • Cars 
  • Vacations

Rather than allowing your adult children to drain your retirement account in the future, have the hard talk with them about what you can and cannot afford. 

The type of advice you receive about your finances may be impacted by the type of advisor you resource for advice. 

Check out our no-cost guide on how to understand The Different Types of Licenses Financial Advisors Have and What They Mean to You.

overlooked retirement expenses

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  1. www.hsabank.com/hsabank/press-release/hsa-bank-survey-consumers-remain-unprepared-for-healthcare-expenses-retirement
  2. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
  3. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
  4. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
  5. https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html
  6. https://www.genworth.com/aging-and-you/finances/cost-of-care/cost-of-care-trends-and-insights.html
  7. https://www.genworth.com/aging-and-you/finances/cost-of-care/cost-of-care-trends-and-insights.html
  8. https://www.moneyrates.com/investment/retirement-spending.htm
  9. https://www.kiplinger.com/retirement/601818/states-that-wont-tax-your-retirement-income
  10. https://seniorsleague.org/half-of-retirees-report-paying-tax-on-social-security-benefits-for-2019/
  11. https://www.bls.gov/opub/reports/consumer-expenditures/2019/pdf/home.pdf
  12. https://www.aarp.org/research/topics/community/info-2018/2018-home-community-preference.html
  13. https://mlaem.fs.ml.com/content/dam/ML/Registration/ml_parentstudybrochure.pdf
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