Retirement spending

Will Your Spending Go Up or Down After You Retire?

Many people assume their spending will go down once they stop working. Some financial professionals even make this assumption while calculating retirement savings goals.

However, this idea that spending is likely to decrease in retirement may not be accurate. In fact, unfortunately, it’s quite common for retirees to find the opposite is true. This can obviously be problematic. If your spending is higher than you’d expected, you may have trouble making your savings last as long as you do.

If you’ve based your savings target on the expectation of decreased spending, you may want to reconsider. When planning your retirement, it’s important to take into account potential factors that may lead to higher-than-expected spending and to prepare for these risks in advance.

Below are a few common reasons why your retirement spending may be higher than you anticipate:

1.) Health Care Expenses

If you enjoyed a robust employer-sponsored health insurance plan, the transition to Medicare may be full of surprises. While Medicare is a helpful resource, it doesn’t cover everything. You may find that your out-of-pocket costs increase.

In fact, Fidelity estimates the average couple in retirement today can expect to spend $260,000 on out-of-pocket health care costs.1 This figure includes expenses such as deductibles, premiums, copays and services not covered by Medicare, like dental treatment and some types of rehabilitation.

One way you can help plan ahead for these costs is to contribute to a health savings account, also known as an HSA. This will create a tax-advantaged reserve fund that you can use to help cover future medical-related costs. Also consider supplemental Medicare policies, which can help cut down your out-of-pocket payments.

2.) Taxes

Even as a retiree, you still have to pay taxes. The amount of those taxes may be surprising. While the amount you owe may not change significantly in retirement, the taxes may be more noticeable. While you were working, your taxes were likely withheld from your paycheck. In retirement, however, they’re likely to come out of your Social Security check, pension payments, retirement account distributions and more. Also keep in mind that distributions from 401(k) accounts and traditional IRAs are taxable.

Don’t overlook the fact that you’ll have to pay taxes on much of your retirement income. Plan ahead by making sure to factor taxes into your projected retirement expenses. This way you can help prevent taxes from becoming an unexpected issue and a threat to your financial well-being in retirement.

3.) Discretionary Spending

It’s not uncommon for retirees to find that their recreational spending increases after they stop working. When you retire, you may have more money and more free time than you’ve ever had. This can be a dangerous combination.

As a retiree, it’s natural to want to enjoy all your new free time with travel, shopping, dining out and other activities that involve spending. There’s nothing wrong with having fun, but it’s important to remember to keep your spending within reason. You don’t want to threaten your financial stability in the later years of retirement.

One way you can avoid this is to prepare a budget with your projected income and spending in retirement. This can serve to guide your spending decisions and ensure you remain aware and in control of your finances.

Do you know the answers to the 4 most important retirement questions?  Want help developing your retirement spending plan? Let’s talk about it! Contact us today to learn more. We can help you analyze your needs and develop an appropriate strategy.

 

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

 

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