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Planning for your retirement can be challenging, in part because of the many costs that arise at a time when you no longer have traditional income. Luckily, many of those expenses are easy to identify and plan for, such as those for traveling, housing and insurance. However, there are several retirement costs you may not be aware of.
Even with careful retirement planning, the true cost of retirement may be higher than you expect. Here are a few unexpected financial costs you may face in retirement to help you get ready for what could come.
3 retirement costs that could surprise you, experts say
Preparing for these expenses can help you stretch your savings and make the most of your golden years:
Non-covered medical expenses
While retirees expect to incur different healthcare costs, many are surprised by how much they have to pay out of pocket because they overestimate what Medicare covers.
Medicare’s main plans are Part A and Part B, which cover different costs.
- Part A: This plan helps cover inpatient hospital stays, skilled nursing facilities, hospice services and home health care.
- Part B: This part covers doctor visits, outpatient care medical equipment and preventative services.
However, these plans do not cover many expenses, including dental, vision and hearing aids. Prescription drugs and copays are also uncovered. Many experts recommend a Health Savings Account (HSA) or Medicare Supplemental Health Insurance (Medigap), or both, to help cover these medical expenses.
Consider taking advantage of a health savings account (HSA), if available, while you’re working. These accounts allow you to contribute funds before taxes, grow them tax-free and use them for healthcare costs without incurring taxes.
It’s also essential to understand what Medicare covers and how you can fill in the gaps.
“Be sure to sign up on time so you avoid any penalties, too,” says Lawrence D. Sprung, founder and lead wealth advisor at Mitlin Financial in Hauppauge, New York. “Annually make sure you compare your medicare advantage and Part D plans for coverage and cost. Medigap plans can also provide additional savings to cover out-of-pocket costs not covered.”
Similarly, many retirees are unaware that Medicare doesn’t cover custodial care, and there are limitations which could affect long-term care coverage. For this reason, you might consider adding long-term care insurance, especially if your family family has a history of serious health issues.
Start comparing your long-term care insurance options online now.
Unexpected home repairs
Most soon-to-be retirees understand they may want to consider whether to downsize into a more affordable home or stay in their current residence. However, many are unaware of how unexpected home repairs or renovation plans will impact their finances. According to a 2023 T. Rowe Price survey, home repairs and other unplanned home expenses are the most common unexpected costs in retirement.
Retirees should rely on emergency funds, a separate home repair fund and homeowners insurance to better handle these unexpected expenses, says Jake Skelhorn, partner and wealth advisor at Spark Wealth Advisors in Plymouth, Minnesota.
“Just like your working years, retirement still calls for a liquid emergency fund for unexpected expenses like a new roof, A/C unit or vehicle repairs. A typical retiree’s portfolio, in my opinion, will have five or more years of essential living expenses in stable investments like bonds and cash. In addition to that, to plan for one-off expenses like home repairs, I may recommend a separate high-yield savings account with another $20-$30K so a quick withdrawal doesn’t adversely affect their investment portfolio,” Skelhorn says.
Income taxes
While you may not earn a traditional income in retirement, you will still bring in money. Income from Social Security benefits, pensions and other retirement accounts may still be taxed in retirement. The money you contributed to pre-tax retirement accounts, plus any earnings, will be taxed as income when you withdraw it in retirement.
Chris Urban, founder of Discovery Wealth Planning in McLean, Virginia, advises being proactive about tax planning as early as possible.
“Develop a plan for what your assets and liabilities, income and expenses might be throughout various stages of your retirement. As you think about collecting a pension and/or Social Security benefits, you absolutely need to be considering the effect that taxes will have on your benefits. This surprises some people, but up to 85% of your Social Security benefit could be taxable depending on a household’s combined income,” Urban says.
Urban advises retirees to think carefully about how their guaranteed income will affect withdrawals from their retirement and investment accounts, as these will likely have different tax implications.
“The sooner you get started developing a plan the longer the time horizon you have to reduce your lifetime tax burden.”
The bottom line
When you retire, you’ll rely on different sources of income and health insurance than you did during your working years. This transition may impact your finances in unexpected ways, but planning ahead can help you navigate these changes. For peace of mind, consider consulting a financial advisor and and tax accountant to plan for anticipated and unexpected retirement costs.