Why Your Spending May Not Decrease in Retirement

Very often, the success of one’s retirement plan is dependent upon the accuracy of the assumptions in the plan. You’ve likely made assumptions about your retirement income, your life expectancy and maybe even your need for medical care. One big assumption is the amount of money you’ll spend every year after you retire.

It’s a common assumption that spending goes down in retirement. Even some financial professionals rely on this assumption when calculating a retirement savings target. However, this is not always the case. Many retirees find their spending is much higher in retirement than they’d expected. Sometimes it’s even higher than their spending level had been while they were working.

When you determine your retirement savings goals, it could be a big mistake to underestimate your projected spending. There are many reasons spending may increase in retirement, and it’s important to take these factors into account ahead of time.

Below are a few common reasons spending can increase in retirement:

Increased Health Care Costs

Retirement often leads to a change in your health coverage. Transitioning from an employer-sponsored health care policy to Medicare can be difficult. This may be especially true if you had a robust employer plan. Medicare doesn’t cover everything, and you may find you have a significantly higher copay for prescriptions or doctor visits.

Fidelity estimates the average retired couple will spend $260,000 on out-of-pocket medical costs.¹ Those expenses include things like premiums, deductibles, copays and certain health care services such as dental and vision, which aren’t covered at all under Medicare.

You can prepare for these expenses ahead of time by contributing to a health savings account and building up a tax-advantaged reserve to help cover your health care costs in retirement. You may also want to consider a range of supplemental insurance policies that can help fill in the gaps in Medicare coverage.

Taxes

It’s possible your out-of-pocket tax costs could increase in retirement. While you’re working, your taxes are likely withheld from your paycheck, so you may be less aware of their true cost.

During your retirement, your taxes will come out of your Social Security, pension payments, retirement account distributions and other income sources. It’s important to be aware that you’ll have to pay taxes on much of your retirement income. Also, keep in mind that distributions from 401(k) and traditional IRAs are taxable. By planning ahead, you can ensure you take these expenses into account and budget accordingly.

Increased Discretionary Spending

Although you may not expect it, it’s common to find an increase in discretionary spending in retirement. The combination of more money and more free time frequently leads to greater spending, which can be hazardous to the health of your finances.

Many retirees fill their newfound free time with travel, shopping, dining out and other activities that involve spending money. There’s nothing wrong with having fun, of course, but it’s important to be aware of your spending so that it doesn’t jeopardize your financial security in the decades to come.

Preparing a budget that accounts for your projected income and expenses in retirement can help guide your spending decisions and ensure your spending remains within a reasonable limit.

Ready to develop your retirement spending plan? Let’s talk about it. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.

¹https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-in-retirement-rise

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16438 – 2017/2/15