Biggest Expenses For Retirees

By Denise Appleby | February 10, 2012 AAA

According to the 2011 Retirement Confidence Survey (RCS) published by the Employee Benefits Research Institute (EBRI), "The age of workers not at all confident about having enough money for a comfortable retirement grew from 22% in 2010 to 27%, the highest level measured in the 21 years of the RCS."

Even for retirees who do not have this concern, longevity risk can become an issue when unforeseen expenses arise. Retirees can avoid sticker shock about the real cost of retirement, by being aware of some of the expenses to which most of their retirement savings could be allocated.

See: Top 5 Underestimated Retirement Expenses

Heathcare Costs
The cost of healthcare usually increases for retirees, as older individuals often require more frequent and advanced medical care for age-related illnesses. In addition, many lose healthcare coverage that is usually provided by employers when they leave the workforce. For individuals who are required to cover the cost of their healthcare, the amount can represent a significant portion of their retirement expenses.

Consider this: According to America's Health Insurance Plans' (AHIP) report titled: Individual Health Insurance 2009: A Comprehensive Survey of Premiums, Availability and Benefits, the annual premium for single health care policies averaged $5,755 for persons aged 60-64 and $9,952 for families headed by persons aged 60-64. With additional out-of-pocket costs, this can add up to significant amounts overtime. Still, this is just the tip of the iceberg. Consider the following, as provided by the EBRI in their May 2008 Brief #317:

  • "A male age 65 in 2008 and retiring at age 65 will need anywhere from $64,000 to $159,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they are comfortable with a 50% chance of having enough money and $196,000 to $331,000 if they prefer a 90% chance."
  • "Women age 65 retiring in 2008 will need anywhere from $86,000 to $184,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they are comfortable with a 50% chance of having enough money, and $223,000 to $390,000 if they prefer a 90% chance."

The report goes on to say that individuals who reach 65 in 2018 or later, may need savings of about $550,000, for men, and $654,000, for women. However, this depends on factors which include the source of health insurance coverage to supplement Medicare, any employer subsidies, prescription drug use and their savings goal related to their comfort level, with a 50%, 75% or 90% chance of having enough savings to cover healthcare expenses during retirement.

As high as these costs are, then do not include long-term costs, which would increase the amounts significantly. (For more information, read Buying Private Health Insurance.)

Long-Term Care Costs
According to medicare.gov, about 12 million men and women over the age of 65 will need long-term care by 2020. For those who do not have long-term care insurance, the related expenses can wipe out a lifetime of savings.

According to The Center for Retirement Research at Boston College in their April 2009 report titled "Long-Term Care Costs and the National Retirement Risk Index," in 2008, the annual cost of a nursing home was about $70,000 for a semi-private room and $77,000 for a private room.

The actual cost will depend on the state in which the service is provided, the service-provider and the level of care needed. Individuals should consult with a financial advisor to determine if they need long-term care insurance.

Income Taxes
Income tax is often overlooked when individuals perform financial retirement analysis, which can result in an overestimation of the amounts that would be available. Consider that U.S. Retirement accounts held an estimated $17,778 Billion dollars at the end of 2010, of which only $265 Billion dollars were held in Roth IRAs.

This means that about $17,513 Billion will be subject to income tax when withdrawn from those retirement accounts. For many taxpayers, this means that their retirement savings could be reduced by a significant amount, when withdrawn to cover living expenses. For instance, a taxpayer with a 25% tax rate might need to withdraw $50,000 to cover a $37,500 expense, and the rest would be owed to the tax authorities.

The Bottom Line
Retirement financial readiness is affected by many factors, primarily the amount of savings one has accumulated. However, many miscalculate the amount needed to finance their retirement, because the most expensive retirement items are often overlooked. When determining retirement readiness, individuals should work with a competent financial professional to perform a comprehensive assessment. (To learn more, check out What's The Minimum I Need To Retire?)

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