5 Costs Not to Overlook in Your Retirement Budget

Pink piggy bank on a beach in a deck chair wearing sunglasses with golden sand a blue ocean and vivid blue sky
Duncan Selby/AlamyDon't forget to budget for the travel and hobbies you will finally have time for in retirement.
By Dave Bernard

Most people accept that retirement won't be cheap. But just how expensive will it be? Visions of the ideal retirement range from the extravagant pursuit of everything we have dreamed of to frugal plans calculated to stretch the buying power of our hard earned savings. Whatever course we set, we need to accurately estimate and budget for our future. While the final tab will vary depending on your lifestyle, some expenses are shared across-the-board and need to be budgeted for.

Health care costs. Health care costs will be one of the biggest expenses you must deal with in retirement. A 65-year-old couple retiring in 2013 will need $220,000 to cover health care costs during retirement, according to calculations by Fidelity. This figure is based upon average life expectancy data. If you are lucky enough to live longer, those costs can be even more. And these numbers do not account for long-term care expenses. The U.S. Department of Health and Human Services predicts that 70 percent of those age 65 and older will require some type of long-term care services. The cost of care varies depending on whether you receive it at home, in adult day care, at an assisted living facility or in a traditional nursing home. The average cost for a private nursing home is about $90,000 per year, assisted-living facilities average $3,477 a month and hourly home care rates average $46 for a Medicare-certified home health aide, according to MetLife. Failure to account for this significant expense means you may not be able to afford the care you need.

Basic living expenses. Some expenses go away in retirement. Most education loans and mortgages have been paid off, or at least significantly reduced. And retirees no longer need to set aside money to build a nest egg. But other expenses will stubbornly continue. It is reasonable to expect basics like gas, electric, water, TV, Internet and garbage bills to remain relatively unchanged with the exception of normal rate increases over time. Food bills should also remain relatively stable unless you decide to upgrade your lifestyle to gourmet status. You will need to include the cost of various insurance programs you subscribe to, potentially including health, home, automobile, liability and long-term care coverage. And even if you own your house outright, depending on where you live you may have to pay property taxes that can amount to 1 percent or more of your assessed value.

Recreational expenses. No one looks forward to a retired life spent doing nothing. Instead, we see ourselves engaging in activities and adventures we could not undertake while mired in the working world. Since this is our time to do what we want, we need to budget for recreational expenses to take advantage of our new freedom. Many retirees hope to travel more and spend longer periods of time at various destinations. My wife and I like to focus our travel on the destination rather than the accommodations. It is easy to spend a fortune on fancy lodging and big meals. But with a little effort you can spend time in faraway places without ruining your budget. A little frugality can allow you to visit more destinations while building quality memories along the way. Whatever your retirement recreation choices, it is important to have sufficient savings to fund your efforts.

Unforeseen expenses. Over the years we have had to deal with many unexpected bills. A family member needs to move home "for awhile" to get back on his feet, the transmission in the car goes out or an unexpected illness necessitates a hospital stay. A single emergency can have a significant impact on carefully laid retirement plans. You can add to your peace of mind by setting aside a monetary cushion for possible expenses that might suddenly materialize in retirement.

Miscellaneous expenses. Do you like to collect vintage automobiles, take luxury cruises or visit top rated restaurants? While these things may boost the quality of your retirement experience, they can also add to expenses. You don't want retirement to be a time when you are forced to set aside the unique interests you have been waiting for so long to explore. If you can make the right preparations and set aside the necessary funds there is no reason you can't feed your fancies as a retiree.

Dave Bernard is the author of "I Want To Retire! Essential Considerations for the Retiree to Be." Although not yet retired, he focuses on identifying and understanding the essential components of a fulfilling and meaningful retirement. He shares his discoveries and insights on his blog Retirement-Only The Beginning.

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5 Costs Not to Overlook in Your Retirement Budget
Eliminating your mortgage is one of the best ways to make retirement more affordable because it removes a sizable monthly bill. While you'll still have to pay taxes and maintenance costs for your home, those expenses are likely to be a fraction of your mortgage payments.
Once your children are independent, you will likely no longer need a several-bedroom house in a good school district with a large yard that can be expensive to maintain. Consider downsizing to a smaller home in a less-expensive neighborhood, and add the proceeds of the sale to your nest egg.
Where you live plays a big role in how much you pay for food, taxes and a variety of other services. Moving to an area where the cost of living is significantly less could allow you to spend down your retirement savings more slowly.
If you and your spouse commuted to separate places each day, it is likely that you each needed a car. In retirement, you might be able to get by with one car, thus eliminating the insurance, gas and maintenance costs of the second vehicle. In walkable communities with good public transportation, you may even be able to get by without a car in retirement.
In retirement, income tax will be due on withdrawals from traditional 401(k) and individual retirement accounts, but you can space out your withdrawals to avoid a hefty tax bill in a single year. Prepaying income tax on some of your retirement savings using a Roth IRA or Roth 401(k) allows you to avoid a big tax bill in retirement.
Investing in high-cost funds reduces your return. Minimizing investment costs is especially important for retirees who are living off income from their portfolio. In this case, selecting the lowest-cost funds that meet your investment needs translates to more money in your pocket.
There are significant penalties if you withdraw money from your retirement account too soon or too late. There is also a reduction in benefits if you sign up for Social Security early, and a late enrollment penalty if you delay signing up for Medicare Parts B and D. Pay attention to important retirement deadlines to avoid paying more than you need to.
Health care is likely to be one of the biggest and least predictable costs you will face in retirement. But there are some things you can do to control your health costs. Consider purchasing a supplemental policy to Medicare to fill in some of the gaps and cost-sharing requirements traditional Medicare doesn't cover. Also, shop for a new Medicare Part D plan every year to make sure you are getting coverage for your medications at the best price.
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One of the major perks of growing older is getting discounts at movies, museums and restaurants. While some senior discounts are well-publicized and open to everyone old enough to have an AARP card, others are available only to those who ask. A little research can add up to big savings if you’re willing to admit your age.
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