Your Spending Could Actually Increase in Retirement

Filed under: Retirement

Very often, a retirement plan is only as good as 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 in many retirement plans is the amount of money you’ll spend each year after you retire.

It’s a common assumption among many workers and even financial professionals that spending goes down after you stop working. This assumption is often used when calculating a retirement savings target.

However, this it’s not always true that spending goes down after you retire. Many retirees find their spending is much higher than they anticipated. Sometimes their spending even increases after they stop working.

When you determine your retirement savings goals, it might be a 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:

 

Health Care Costs

For most, retirement brings a transition from employer-sponsored health insurance to Medicare. This transition can often be surprising for new retirees, especially if you had a robust employer plan. While Medicare is a valuable resource, it doesn’t cover everything.

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. Even for the services that are covered, Medicare usually only pays a portion of the cost. That means you may have to pay the balance out-of-pocket.

You can prepare for these expenses ahead of time by contributing to a health savings account to build 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

Your taxes may not necessarily increase in retirement, but you could feel their impact much more acutely. While you’re working, your taxes are likely withheld from your paycheck, so you may be less aware of their true cost.

During retirement, though, 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 usually 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 for retirees to see their discretionary spending increase in retirement. The combination of more free time and a substantial amount of readily available money can often lead to increased spending.

Many retirees fill their newfound free time with travel, shopping, dining out and other activities that cost 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 later years of retirement. 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. Contact us at Ambrose Financial and Insurance Services to learn more. 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