The Hidden Costs of Retirement

When most people think about planning for retirement, they tend to have a "magic number" in mind that they believe will support them through their golden years. And many people think about how they'll spend their retirement savings on a month-to-month basis, rather than taking a longer view.

Aside from traveling and doing everything you've waited a lifetime to do, retirement can have a lot of hidden costs that you may not consider. Taking a close look at your expenses in retirement and mapping out a plan for spending can help you make sure you're truly prepared for the retirement you want. By building a retirement budget, you can be prepared for anything that comes your way.


How Much Does the Average Retiree Live on?

American households headed by a person who is 65 or older spent an average of $51,127 per year, according to the Bureau of Labor Statistics- 2021 Consumer Expenditure Report. Younger members of this group, between the ages of 65 and 74, spent an average of $56,435 annually, while people aged 75 and older spent an average of $45,820.

According to these figures, an average household headed by retired Americans will spend about $4,000 per month throughout retirement.


Start With Money Coming In

Before building a retirement budget, you should determine how much income you'll have.

Sources of income during retirement often include:

  • Pension payments.
  • Annuities and distributions from retirement accounts.
  • Social Security payments.

In addition, many retirees continue working on a part-time or consulting basis to keep earning income.

Take time to determine how much monthly income you can expect from all sources. That figure will be crucial as you develop your retirement budget.


4 Major Retirement Expense Categories

The next step in budgeting for retirement is determining your monthly or annual expenses. For most people, expenses fall into four main categories: essential, discretionary, one-time expenses and unexpected expenses.

1. Essential Expenses

Your essential monthly expenses will include food, utilities and other household expenses, transportation, insurance and health care. If you will have a mortgage in retirement, be sure to include that as an expense until you expect to pay it off.

Keep in mind that throughout retirement, you will continue to be required to file tax returns and pay taxes, so it's important to determine how much you'll owe each year. Some states provide tax cuts for retirees, but some types of retirement income are still taxable. And even if your mortgage is paid off, you may still have to pay annual property taxes, depending on your state tax laws.

2. Discretionary Expenses

Discretionary expenses represent "wants" rather than "needs." They include entertainment, dining out, travel, hobbies, charitable donations, gifts, subscriptions and memberships. These items are extras, so if your retirement budget is tight, they are the things that can be cut or scaled back.

3. One-time Expenses

During retirement, you may face one-time expenses that should also be accounted for in your budget whenever possible. That might include a child's wedding or a grandchild's college tuition. Other one-time expenses could include funeral expenses for a loved one or a major home improvement project.

As you plan ahead for spending in retirement, be sure to factor in potential one-time expenses so you can be prepared. If you own a home, a good rule of thumb is to plan to spend 1% to 4% of your home's value each year on home maintenance and repairs. And if you own a vehicle, make sure to budget for annual vehicle maintenance and repairs as well.

4. Unexpected Costs

In addition to planning for all the expenses you expect during your retirement years, it's important to be prepared for the hidden costs of retirement. Those unexpected expenses often derail people's retirement plans, such as a healthcare emergency or long-term care expenses.

Other potential unexpected costs could include:

  • A major home repair or upgrade, such as modifying a bathroom to be wheelchair accessible.
  • Providing financial support to children or grandchildren.
  • Travel to visit or help family members.

Just as an emergency fund is important during your working years, it's a good idea to maintain an emergency fund during retirement. Those extra funds will be invaluable when you face the inevitable unexpected expenses of life.


Debt Payments & Retirement

If you can pay off debts before retiring, you won't have to use your retirement funds to make payments on past debts. However, if that's not possible, you'll have to include debt payments in your retirement budget.

Consider how many years remain on your mortgage or home equity loan and include those payments in your budget. If you have credit card balances, auto loans, or other debt, develop a plan for paying it off and budget for the appropriate amount each month until it's paid.


Find the Difference

Building a secure, enjoyable life in retirement starts with building a well-informed and well-funded retirement budget.

Once you've tallied up all your estimated expenses for retirement, subtract that figure from your expected retirement income. If the total expenses exceed your expected retirement income, you will need to consider boosting your income in retirement.

You can increase your retirement income by working longer to build up additional savings and by continuing to work part-time during retirement. In addition, work to invest strategically in a 401(K), IRA or other retirement account. A wealth planning specialist can help you devise a retirement planning strategy that will work for your situation and goals.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice, and any information provided should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances. Trust services are offered through City National Bank.