Retirees Are Grappling With Unplanned Expenses -- but That's an Avoidable Fate

Senior couple smiling as they walk by the water

Many folks budget for retirement under the assumption that their living costs will go down once they stop working. And there's some truth there, especially since 70% of seniors manage to enter retirement mortgage-free, thus shedding what was previously their single greatest monthly expense. And let's not forget commuting costs, which also go away in retirement.

Still, for many seniors, retirement is more expensive than expected -- so much so that nearly half of seniors wind up spending more, not less , during their first two years out of the workforce. This point is further driven home in a new Capital Group study , which found that numerous retirees are caught off guard by how much they're actually spending.

What's costing retirees more than expected? According to the aforementioned research:

  • 43% are spending more on healthcare than planned.
  • 40% are spending more on travel.
  • 34% are spending more on taxes.
  • 25% are spending more on food.

Clearly, these are all pretty significant expense categories, and ones that can really add up. If you're nearing retirement and are thinking you've saved enough to cover your living costs, you may want to think again. Otherwise, you'll risk depleting your nest egg sooner than expected, thus increasing your risk of running out of money later in life.

On the plus side, if you're not yet retired, there are steps you can take to better plan for these budget-busters. And once you do, you'll be better positioned to ramp up your savings as needed.

Healthcare costs in retirement

Many workers assume that once they retire, Medicare will cover all of their health-related needs. In reality, there are lots of services Medicare won't cover, perhaps the most expensive of which being long-term care . It's estimated that 70% of seniors 65 and older will need some type of long-term care in their lifetime. To avoid getting creamed by this potentially colossal expense, consider buying long-term care insurance in your 50s, when you're more likely to not only get approved, but snag a health-based discount.

Another way to ease the financial burden of healthcare in retirement is to get a handle on your out-of-pocket costs. Even with Medicare, the average healthy senior couple today is expected to spend a good $400,000 on medical costs in retirement, not including long-term care. Be sure to save for this expense during your career to avoid feeling the strain in retirement, even if that means working a little longer than planned to boost your nest egg.

Travel in retirement

The upside of retirement is the abundance of free time you're bound to have on your hands. The downside, however, is the same exact thing. If you don't keep busy in retirement, you're more apt to fall victim to depression or other ailments. Still, occupying your time comes at a cost -- yet 58% of workers don't plan for leisure expenses in retirement, according to a Merrill Lynch study.

If your goal is to travel extensively in retirement, then you'll need to up your savings game before leaving the workforce. Map out some itineraries you want to follow during your early years of retirement (since, conceivably, you'll be doing the most travel when you're younger and have more energy) and work with travel agents to get a handle on your costs. And then, either work on boosting your savings to buy yourself the opportunity to take those trips, or adjust your expectations accordingly. If your savings can only support one international trip per year, and you don't want to work longer than planned, then you may need to settle on that and find other things to do with your time.

Taxes in retirement

Countless seniors are shocked to learn that they're not somehow exempt from taxes in retirement. But actually, there's a good chance the bulk of your senior income will be subject to taxes. This includes withdrawals from your traditional 401(k) or IRA (not from a Roth though), investment gains in a regular brokerage account, and even Social Security.

To avoid getting stressed later on, plan on paying taxes during retirement, or take steps to lower them. You can accomplish the latter by converting some or all of your traditional retirement plan into a Roth account, or loading up on municipal bonds, whose interest income is always federal tax-exempt (and sometimes exempt at the state and local level as well). You can also learn to be strategic about selling investments -- those held for at least a year and a day, and then sold at a profit, are taxed at a lower rate than short-term gains, so being patient could significantly slash your tax bill.

Food costs in retirement

We all need to eat, seniors included. But just because you're retired doesn't mean your appetite will go down and your food costs will follow suit. Quite the contrary -- you're more likely to spend money on food in retirement since restaurants can serve as a means of entertainment, or an excuse to get out of the house. (Plus, with all of those early bird specials, you're likely to be enticed.)

But here's the thing: Any time you dine out, you're automatically signing up to pay a 300% markup on the food you're eating. That's just how restaurants typically operate. It's estimated that the average senior household spends $459 per month on food, $170 of which goes toward restaurant meals. If you don't have the savings to support that kind of spending, then plan to limit the extent to which you pay for prepared food. It's one of the easiest expenses to slash, and if you really need a reason to leave the house, you can always take turns hosting potlucks with other retirees in your neighborhood.

While saving diligently for retirement will help ensure that you have enough money to cover your expenses, it's also crucial to read up on what those costs will likely entail. The more prepared you are, the less likely you are to get thrown when your expenses start mounting before your eyes.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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