Table of Contents
Table of Contents

4 Big Reasons Your Expenses Could Rise in Retirement

And ways to save on each

Many of us assume our spending will decline in retirement but this isn't always the case. There are four prime reasons why your expenses could actually rise. The good news is that there are ways to save money on each.

One common rule suggests people plan on needing about 70% to 80% of their pre-retirement income to pay the bills. Many retirees do find that their expenses go down, sometimes even below that estimate. There are no more daily commuting costs or having to maintain a work wardrobe, and fewer (if any) pricey business lunches. Add to this an end to withholding for 401(k) plans, Medicare, and Social Security.

But others are surprised to see expenses heading in the opposite direction. Travel is one big reason. Uncovered medical expenses are another. Ditto for unexpected tax bills. Still another cause: Retirees simply have more free time to spend, spend, and spend. 

Key Takeaways

  • While many retirees find that their expenses go down once they stop working, this is not always the case.
  • The common rule about retirement is that you'll need about 70% to 80% of your pre-retirement income to cover your expenses during retirement.
  • More money spent on travel and uncovered medical expenses, as well as unexpected tax bills and more free time to shop, are four big reasons why. 
  • Discounts and seniors' perks can help you save money.
  • It’s possible to save money with proper planning.

1. Travel

Your travel expenses could easily shoot up in retirement, particularly in the early years. You’ll have the time to go to the places you’ve always wanted to see but never had time for when working and perhaps raising kids. Of course, your job-related commuting expenses will no longer be a factor, so whatever you were spending there each month can be applied to your new and fun travel budget.

Ways to Save on Travel

Many hotels and some airlines offer senior discounts. But check before you buy: They aren’t always the best deal you can get.

Senior discounts might knock 10% to 15% off the regular room rate at many hotel chains, but better promotions are often available. Rather than requesting a senior discount upfront, ask the reservations agent for the best available price on the kind of room you want. Next, see if the senior discount can be applied on top of that. Consider the senior rate alone as your fallback position.

It’s much the same when it comes to plane tickets. Some airlines, such as American, Delta, and United, offer senior fares on selected routes, generally to passengers 65 and older. It could be worth a call to ask, but, as usual, you might land a cheaper ticket with a little searching.

If you’re open to rentals and don’t mind being in the kitchen, consider VRBO or Airbnb

“Offerings are typically other people's second homes in typical vacation locations,” says Bill DeShurko, CIO of Fund Trader Pro in Centerville, Ohio. “Now that we are empty nesters and hope to pick up on our vacationing, although we could fly to more exotic destinations, we have a year planned with VRBO accommodations. Our idea of a vacation is sitting out on our deck looking out over a lake, the mountains, or a beach. And we look for activities that include boating, golf, tennis, and fly fishing. We never seem to not be able to find a VRBO listing.”

Don't Forget Insurance Costs

Travel insurance, which you’re almost certain to be offered, is another consideration. Before you automatically buy a policy for peace of mind, make sure you know exactly what it covers and which restrictions lurk in its fine print⁠—these could keep you from ever collecting.

If you’re on Medicare, bear in mind that it generally doesn’t cover medical expenses outside the United States. That includes if you are on a cruise ship that is more than six hours from a U.S. port. That's another reason to buy travel insurance. But just make sure healthcare is covered in the policy, not just trip cancellation.

Some Medicare supplement, or Medigap, policies provide for emergency healthcare coverage when you’re away from the U.S. If you have Medigap, review your policy before you pay for duplicative coverage.

Perks for Seniors

It’s also worth checking your credit cardholder agreement or calling the issuer to see what travel coverage it provides—if it does any at all. Some cards cover such risks as lost baggage, but only if you bought your travel tickets with that specific card.

Probably the greatest edge retirees have in getting terrific travel deals is their flexibility to travel when they aren’t competing with business travelers or vacationers whose schedules are more constricted.

“Overall expenses rise between 2% and 4% annually, and if retirement income is fixed, this can be a challenge 10 to 15 years into retirement,” according to Wes Shannon, CFP®, managing partner, SJK Financial Planning, LLC, in Hurst, Texas.

2. Healthcare

Medicare is the federal program that insures many Americans over age 65. As noted earlier, it usually won’t cover you if you get sick and need treatment overseas. It also doesn’t fund a number of other expenses that your previous, employer-paid health insurance probably covered. These include certain dental procedures, eye exams, hearing aids, and routine foot care, among others.

This means you may want to build some extra money for these services into your retirement budget. If your former employer provides any retiree health benefits, those will figure into the equation too.

“Healthcare is one of the larger budget items for retirees, especially in their later years. Understanding industry statistics in terms of healthcare expenses beyond what is covered by Medicare parts A and B is a good starting point to start saving and budgeting for future healthcare expenses,” says Mark Hebner, founder, and president, Index Fund Advisors, Inc., Irvine, California, and author of Index Funds: The 12-Step Recovery Program for Active Investors.

Ways to Save on Healthcare

If your non-covered medical expenses are substantial, one way to ease the burden a bit is by bunching them into a single calendar year and claiming a tax deduction. Don’t put off emergency procedures. But if you can safely wait a bit for non-urgent dental work or a new hearing aid, you might accumulate a large enough bill to reach the threshold for claiming a deduction.

Eligible, unreimbursed medical and dental expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI).

3. Taxes

Your income may decline during retirement, resulting in a lower marginal tax bracket and a smaller income tax bill. But if you have a lot of money in retirement plans that are subject to required minimum distributions (RMDs), such as traditional IRAs, you could actually find your income and income taxes going up. 

“Most people are surprised at the tax hit when withdrawing from traditional 401(k) and IRAs in retirement. Roth IRAs can help soften the tax blow since those withdrawals are tax-free,” says David N. Waldrop, CFP®, president of Bridgeview Capital Advisors, Inc., in El Dorado Hills, Calif. Plus, Roth IRAs aren't subject to RMDs.

Note, too, that your Social Security benefits could be taxable if your income exceeds certain limits. For example, if your total income exceeds $32,000 for couples or $25,000 for singles, you may have to pay taxes on it.

If you turn 73 on or after Jan. 1, 2023, you must begin taking RMDs on April 1 of the following year, according to the SECURE Act 2.0. You must continue to take RMDs on April 1 the year after you turn 72 between Jan. 1, 2020, and Dec. 31, 2022. If you don't take the withdrawals as required, the penalty is 25% of the value of the missed RMD.

Ways to Save on Taxes

First, if you’ve reached the age for RMDs, don’t ignore them, or you’ll face a substantial tax penalty. Try to get a close estimate of how much money you’ll need to cover the taxes on any RMDs and determine the source of this money.

This could mean withdrawing more from your retirement accounts to cover the tax or taking money from non-retirement accounts, which might be taxed at a lower rate. The former is taxed as ordinary income, while the latter may be taxed at more favorable, long-term capital gains rates. If this is unfamiliar territory for you, you might want to enlist the services of an accountant or a financial planner to run some different scenarios. 

Also, find out whether being of retirement age entitles you to any special breaks on property taxes where you live. You can’t assume you’ll just get them automatically, as your local tax assessor probably has no idea how old you are. The website for your state tax department is a good place to start. 

4. Shopping

Retirement often means spending more time at home, particularly during daylight hours. For instance;

  • You could find yourself wondering how you ever lived with those worn carpets and dingy drapes, not to mention that circa-1970s wood paneling.
  • You might also want to treat yourself to an up-to-date kitchen, a more luxurious bath, or a separate home office where you can manage your investments or write your spy novel.
  • You may want to make some universal design alterations to increase your security and comfort, such as replacing doorknobs with handles or installing grab bars in the bathroom.

If renovations would make your life more comfortable (and if you can afford it), there’s little reason to deny yourself. 

Don’t forget, however, that retirement can last a long time, and many of us are likely to live into our 90s or beyond. Ideally, our savings should hold out as long as we do. In other words, don’t go crazy with credit cards.

Ways to Save on Shopping

Fortunately, one of the great things about being retired is that you don’t just have more time to shop. You also have more time to shop around for the very best deals. So take advantage of that and enjoy it.

The Bottom Line

While you take advantage of the freedom retirement brings, keep an eye on your expenses. Set a budget and cut back if needed. Also, take the time to find the best deals on travel and make sure to be as tax efficient as possible when it comes to healthcare expenses and required minimum distributions.

Article Sources
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  1. Charles Schwab. "How Much of Your Income Do You Need to Replace in Retirement?"

  2. Kiplinger. "Will You Really Need to Replace 80% of Your Preretirement Paycheck?"

  3. United Airlines. "Senior Travelers."

  4. Delta Airlines. "Fares & Discounts."

  5. Medicare. "Medicare Coverage Outside the United States," Pages 1-2.

  6. Medicare. "Medicare Coverage Outside the United States," Page 3-4.

  7. "What's Not Covered By Part A & Part B."

  8. Internal Revenue Service. "Topic No. 502 Medical and Dental Expenses."

  9. Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)."

  10. Internal Revenue Service. "Distributions from Individual Retirement Arrangements (IRAs)," Pages 27-28 and 35.

  11. The United States Social Security Administration. "Income Taxes on Social Security Benefits."

  12. The United States Social Security Administration. "Retirement Benefits."

  13. "H. R. 2617," Page 831.

  14. Fidelity. "SECURE 2.0: Rethinking Retirement Savings."

  15. IRS. Retirement Plan and IRA Required Minimum Distributions FAQs.

  16. Internal Revenue Service. "Tax Information for Seniors & Retirees."

  17. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

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