As retirement approaches, many expect living costs to decrease due to several factors. Housing expenses may drop as mortgages are paid off or through downsizing and relocating to lower-cost areas. Retirees often fall into lower tax brackets, benefiting from reduced taxes on retirement income. While healthcare expenses can increase, Medicare coverage provides some relief. Discretionary spending may decline as retirees choose budget-friendly activities and take advantage of senior discounts. Entering retirement debt-free and drawing from savings or investments also help reduce financial pressure. Additionally, the end of child-related expenses and reliance on Social Security or pensions contribute to the expectation of lower costs. However, the reality can be more complex, with some expenses rising unexpectedly, challenging these assumptions and putting pressure on a fixed income. 

Understanding these potential increases is crucial for effective retirement planning. Without accounting for these rising costs, retirees may find themselves unprepared for the financial challenges that lie ahead. In this post, we will explore five key expenses that tend to go up during retirement, providing insights into why they increase and offering tips on how to manage them. By being aware of these potential financial hurdles, you can better prepare for retirement. 

Healthcare Costs 

One of the most significant expenses that can increase in retirement is healthcare. As people age, their medical needs often grow, leading to higher costs for treatments, medications, and care. It’s not just the frequency of doctor visits that increases; the complexity and cost of treatments tend to rise as well. Chronic conditions, more specialized care, and the need for advanced treatments can quickly escalate healthcare spending. 

Rising Costs of Medical Treatments and Prescription Medications 

As you age, you may face a variety of health challenges that require ongoing medical attention. From routine check-ups to managing chronic conditions like diabetes or heart disease, the costs of medical care can add up quickly. Additionally, the price of prescription medications has been steadily rising, and retirees may find themselves spending a significant portion of their budget on necessary drugs. Even with insurance, co-pays and out-of-pocket expenses can strain a fixed income. 

The Potential Need for Long-Term Care or Assisted Living Facilities 

Another substantial cost that many retirees may face is long-term care. In fact, the Department of Health and Human Services estimates that 56% of Americans turning 65 are likely to develop a condition requiring long-term care. Whether due to illness, injury, or simply the effects of aging, the need for assistance with daily activities can become a reality. Long-term care services, such as in-home care, assisted living facilities, or nursing homes, can be incredibly expensive. These costs can quickly deplete savings if not planned for in advance.  

Medicare Coverage Limitations and the Need for Supplemental Insurance 

While Medicare provides essential health coverage for those 65 and older, it doesn’t cover everything. Many retirees are surprised to learn that Medicare has limitations, particularly when it comes to long-term care, dental, vision, and hearing services. As a result, many retirees opt for supplemental insurance (Medigap) or Medicare Advantage plans to fill in the gaps. However, these additional policies come at a cost, further increasing healthcare expenses in retirement. 

Tip: Strategies to Manage Healthcare Costs 

To manage these rising healthcare costs, it’s important to plan ahead. If eligible, consider contributing to a Health Savings Account (HSA) during your working years, as these funds can be used tax-free for medical expenses in retirement. Additionally, exploring long-term care insurance options can help protect your savings from the high costs associated with long-term care services.  

Home Maintenance and Modifications 

As you transition into retirement, your home often becomes a central focus, serving as both a sanctuary and a place where you plan to age comfortably. However, maintaining a home and making necessary modifications so that it remains safe and accessible can lead to increased expenses. While you may no longer have career demands, the upkeep of your living space can require both time and money, often more than anticipated. 

Routine Maintenance That Might Have Been Deferred During Working Years 

During your working years, it’s easy to put off certain home maintenance tasks due to a lack of time or immediate need. However, these deferred tasks can catch up with you in retirement. Roof repairs, plumbing updates, exterior painting, and other essential maintenance projects can no longer be ignored, and the costs can add up quickly. Additionally, as you age, you might find it more challenging to tackle DIY projects, leading to higher expenses as you hire professionals to handle the work. 

Home Modifications for Accessibility 

As you plan to age in place, modifying your home for safety and accessibility becomes crucial. Common modifications include installing ramps, grab bars, stairlifts, and widening doorways to accommodate mobility aids. While these changes are necessary to help keep your home safe and functional, they can also be costly. Depending on the extent of the modifications needed, these expenses can significantly impact your retirement budget. 

The Potential Need for More Frequent Home Services 

In retirement, you might find that tasks you once handled yourself, such as landscaping, cleaning, and minor repairs, become more challenging or less appealing. As a result, you may need to hire help more frequently. Whether it’s regular lawn care, housekeeping, or hiring a handyman for minor repairs, the costs of these services can increase over time, especially if you prefer to live independently in your home. 

Tip: Consider Budgeting for These Expenses or Downsizing to a More Manageable Home 

To manage the potential increase in home maintenance and modification costs, it’s wise to create a budget that accounts for these expenses. Consider setting aside funds specifically for home repairs and modifications, so you’re prepared when the need arises. Alternatively, downsizing to a smaller, more manageable home can reduce maintenance costs and potentially free up equity that can be used to support your retirement lifestyle.  

Travel and Leisure 

Retirement often brings the opportunity to finally enjoy the freedom to travel and indulge in hobbies that may have been put on hold during your working years. With more time on your hands, the allure of exploring new places, visiting family, and diving into new activities can be strong. However, this newfound freedom can also lead to a significant increase in discretionary spending (spending money on non-essential purchases), which, if not carefully managed, can strain your retirement savings. 

Increase in Discretionary Spending on Vacations, Hobbies, and Entertainment 

One of the joys of retirement is the ability to travel without the constraints of a work schedule. Many retirees plan to take more vacations, whether it’s cruises, trips to exotic locations, or regular weekend getaways. Additionally, with more free time, hobbies and entertainment—such as golfing, gardening, attending concerts, or dining out—can become more frequent, leading to higher spending. These activities, while enjoyable, can add up quickly and take a larger share of your retirement budget than anticipated. 

The Cost of Visiting Family, Particularly if They Live Far Away 

For many retirees, spending time with family becomes a top priority, especially if grandchildren are involved. However, if your family members live far away, the cost of frequent travel to see them can become substantial. Whether it’s flying across the country or driving long distances, the expenses associated with regular visits—airfare, gas, accommodation, and dining out—can accumulate over time, putting additional pressure on your finances. 

Potential Increase in Expenses Related to New Hobbies or Activities 

Retirement is also a time when many people explore new hobbies or activities they’ve always wanted to try. Whether it’s taking up photography, learning to sail, or investing in a home workshop, these new pursuits often come with their own set of costs. Equipment, classes, memberships, and travel related to these activities can all contribute to higher spending, especially if you decide to pursue multiple new interests. 

Tip: Create a Realistic Budget for Leisure Activities and Consider Less Expensive Alternatives 

To enjoy your retirement without overspending, it’s essential to create a realistic budget for travel and leisure activities. Start by prioritizing the experiences that matter most to you and allocate funds accordingly. Consider setting aside a specific portion of your retirement savings for travel and hobbies, so you have a clear understanding of how much you can comfortably spend. Additionally, look for less expensive alternatives that still allow you to enjoy your interests—such as taking road trips instead of flying or exploring local attractions instead of international destinations.  

Taxes 

One of the less anticipated aspects of retirement is how tax liabilities can shift and, in some cases, increase. While you may no longer have a steady paycheck, taxes don’t simply disappear in retirement. In fact, certain aspects of your income and withdrawals can result in unexpected tax burdens, which can significantly impact your overall retirement finances. 

Taxes on Retirement Account Withdrawals  

For many retirees, the bulk of their retirement savings is in tax-deferred accounts such as 401(k)s or IRAs. While these accounts allow your investments to grow tax-free during your working years, the tax bill comes due when you start making withdrawals. Every distribution from these accounts is treated as ordinary income, which means it’s subject to federal and, in some cases, state income taxes. Depending on the size of your withdrawals, you could find yourself in a higher tax bracket than anticipated, leading to larger tax bills.  

The Impact of Social Security Taxes Depending on Total Income 

Social Security benefits are a critical income source for many retirees, but they’re not always tax-free. The taxability of Social Security benefits depends on your total income, including withdrawals from retirement accounts, pensions, and other sources. If your income exceeds certain thresholds, up to 85% of your Social Security benefits could be subject to federal income tax. This can come as a surprise to retirees who were expecting to keep more of their benefits. 

State and Local Taxes, Particularly if Moving to a Different State 

State and local taxes can also play a significant role in your retirement finances. If you’re planning to relocate in retirement, it’s essential to consider the tax implications of your new state. Some states have no income tax, while others tax retirement income heavily. Additionally, property taxes, sales taxes, and even estate taxes can vary widely from state to state. Moving to a state with higher taxes than where you currently live could increase your overall tax burden, reducing the amount of disposable income you have available. 

Tip: Tax-Efficient Withdrawal Strategies and Relocating to Tax-Friendly States 

To manage your tax liabilities in retirement, it’s important to develop tax-efficient withdrawal strategies. For example, you might consider withdrawing funds from taxable accounts before tapping into tax-deferred accounts or using a Roth IRA, where qualified withdrawals are tax-free. Additionally, planning your withdrawals in a way that minimizes your taxable income each year can help keep you in a lower tax bracket. If you’re considering relocating, research the tax laws of your potential new state to check that you’re not moving to a higher-tax environment. Some retirees may find significant savings by choosing a state with favorable tax policies for retirees.  

Inflation 

Inflation is a silent but powerful force that can significantly erode your purchasing power over time, making it a critical factor to consider in retirement planning. Even a modest inflation rate can lead to a noticeable increase in the cost of living, and without proper planning, retirees may find it challenging to keep up with rising expenses, especially when living on a fixed income. 

 The Gradual Increase in the Cost of Living and Everyday Expenses 

Inflation leads to a gradual increase in the cost of goods and services, meaning that the same amount of money buys less over time. For retirees, this can affect everything from groceries and utilities to healthcare and leisure activities. What might seem like a comfortable retirement budget today could be stretched thin a decade or two down the line as prices rise. The compounding effect of inflation can be particularly challenging for those who have planned for a retirement that spans several decades. 

Impact of Inflation on Fixed Income Sources Like Pensions or Annuities 

For retirees relying on fixed income sources such as pensions or annuities, inflation poses a significant risk. While these income sources provide stability, they often do not adjust adequately—or at all—for inflation. This means that over time, the real value of these payments decreases, reducing your ability to maintain the same standard of living. Even small annual inflation rates can substantially diminish the purchasing power of a fixed income, leaving retirees with less financial flexibility as the years go by. 

The Challenge of Keeping Up with Rising Costs on a Fixed Retirement Income 

As inflation drives up the cost of living, retirees on a fixed income may struggle to keep pace. Without the ability to increase income through work, the rising costs can lead to difficult choices, such as cutting back on discretionary spending, delaying healthcare, or even downsizing your living situation. The unpredictability of inflation rates adds another layer of complexity, making it harder to accurately predict future expenses.  

Tip: Consider Investments That Can Help Hedge Against Inflation 

To protect your retirement savings from the eroding effects of inflation, it’s wise to consider investment options that can help hedge against rising prices. Treasury Inflation-Protected Securities (TIPS), for example, are government bonds specifically designed to protect against inflation. They adjust in value based on changes in the Consumer Price Index, helping to preserve your purchasing power over time. Additionally, a well-diversified portfolio that includes assets like stocks, real estate, and commodities can offer growth potential that outpaces inflation, providing a potential financial cushion in the face of rising costs.  

Conclusion

By anticipating these costs and integrating strategies to manage them, you can help protect your savings and enjoy the retirement lifestyle you’ve worked to achieve. Working with a financial professional can provide you with the guidance and knowledge needed to navigate these challenges and tailor a plan that suits your unique needs. Don’t wait until these expenses catch you off guard—start planning today! 

 

Standard Disclosure 

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.  

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.   

Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

 

References

Bosworth, Arielle. (October 6, 2023). Changes in the List Prices of Prescription Drugs, 2017-2023. ASPE. https://aspe.hhs.gov/reports/changes-list-prices-prescription-drugs 

Hartman, Rachel. (February 28, 2024). 10 Costs to Include in Your Retirement Budget. US News. https://money.usnews.com/money/retirement/articles/costs-to-include-in-your-retirement-budget 

TreasuryDirect. (n.d.) Treasury Inflation Protected Securities (TIPS). https://www.treasurydirect.gov/marketable-securities/tips/ 

Sato, Gayle. (May 31, 2024). 5 Expenses That Can Rise in Retirement. Experian. https://www.experian.com/blogs/ask-experian/reasons-expenses-could-rise-in-retirement/