Some expenses may be able to be reduced or eliminated in retirement, while others may increase with age. Retirement means no commuting costs or expensive clothes for work, and new hobbies or using more health care services may result in new costs. When planning your retirement budget, keep these expenses in mind.
In retirement, housing is likely your most significant expense, but there are many ways to reduce your monthly housing costs. If you pay off your mortgage, you will only have to pay monthly taxes, insurance, and maintenance. You may also be able to pad your nest egg if you downsize to a home that costs significantly less and frees up home equity. Your retirement finances can be improved by moving to a place with a lower cost of living. You may also reduce your heating, cooling, maintenance, and tax bills if you live in a smaller home in a less expensive neighborhood.
Most people don’t pay a premium for Medicare Part A hospital insurance. A standard premium for Medicare Part B medical insurance will be $170.10 in 2022, and high-income retirees will pay an additional premium. A separate annual premium for Medicare Part D prescription drug plans varies depending on your chosen plan. You might also have to pay a third premium if you select a Medigap plan that covers some of Medicare’s out-of-pocket expenses. Late enrollment penalties may be added to your premiums if you fail to enroll for Medicare on time.
In 2022, Medicare Part B has a deductible of $233. Unless you purchase another insurance plan to supplement traditional Medicare, you must pay 20% of the Medicare-approved amount for most medical services. When you are hospitalized, Medicare Part A has a $1,556 deductible, and you will have additional coinsurance charges if your hospital stay exceeds 60 days. Medicare covers several types of preventive care services with no out-of-pocket costs, but others, such as eyeglasses and hearing aids, are typically not covered.
In addition to tax breaks for seniors, retirees may also face new taxes. After years of deferring taxes, you will need to pay income tax on each withdrawal from your traditional 401(k)s and IRAs. The IRS imposes a 50% tax penalty on distributions from tax-deferred retirement accounts after age 72 if you fail to take your distribution. You can reduce your retirement tax bill in several ways by strategically withdrawing money from your retirement accounts. If your retirement income exceeds a certain threshold, part of your Social Security benefit may be taxable.
Cooking healthy meals at home will help you save money on food in retirement. As you retire, you might spend more on expensive dining experiences and lingering lunches with friends. Many restaurants and grocery stores offer senior discounts. Additionally, some stores offer senior shopping hours so older adults can avoid crowds.
Retiring doesn’t mean you no longer need an emergency fund. Home repairs, appliance replacements, and auto repairs will continue to be necessary. You need an emergency fund to avoid spending your retirement savings too quickly. It’s best not to disrupt your retirement drawdown strategy every time something goes wrong.
In retirement, you will have more time to try new things, but those experiences can be expensive. Many museums and movies offer discounts to seniors, and some colleges offer low-cost classes for senior citizens. Senior centers provide social activities specifically for retirees, and many communities offer free or low-cost entertainment for all ages, such as summer concerts and library seminars.
It is now possible for retirees to travel as much as they want now that they have more free time. Only your budget limits you. Hotel and rental car discounts are often available to senior citizens and AARP members. Traveling on a budget can also be achieved by staying with friends or swapping homes. You may be able to save money and avoid crowds by traveling during weekdays and off-peak times as a retiree.
The arrival of a grandchild can throw a retirement budget out of whack. Many grandparents lavish gifts on their grandchildren, frequently travel to see them, provide child care, and set up trusts to provide for their future. Each scenario can affect your retirement budget, and your retirement plan should include gifts or bequests to heirs.
Leaving a legacy
It is common for retirees to leave financial gifts to their children, grandchildren, or other heirs or to pass along treasured items such as jewelry, furniture, or other heirlooms. To ensure that your plans are carried out, make sure your wishes are spelled out in writing.