How Much Money Will You Really Spend in Retirement?

One of the difficult parts of planning for retirement is figuring out just how much money you’ll need to live on. With no wage income coming in after you retire, your income stream will depend on what you’ve been able to save and invest over the course of your lifetime, plus any additional income from pensions, Social Security, and other sources that you may or may not be able to rely on. But while most financial planning works under the assumption that your expenses will decrease in retirement, that may not actually be the case. Here are three possible reasons that may be the case.

1. Healthcare Costs Will Increase

All indications are that healthcare costs will increase in the future, and continue to increase far faster than the rate of inflation. Most retirees will end up signing up for Medicare once they turn 65, but Medicare doesn’t cover all healthcare expenses. For instance, prescription drug coverage requires you to sign up for Medicare Part D. Medicare also doesn’t cover dental, vision, and long-term care. So if you find yourself needing dentures, fillings, or other dental work, you’re on your own. Aside from the premiums you’ll already be paying for Medicare coverage, costs for dental and vision plans will further contribute to your monthly expenses.

Long-term care is a huge wild card, since some Americans will remain healthy enough to live independently well into old age. But if you require daily help with routine tasks such as eating, bathing, etc., then Medicare won’t cover those costs. If you end up requiring that kind of assistance, it will cost you extra. In fact, the average 65-year-old American today can eventually expect to pay $138,000 in long-term care costs.

Overall, the average retiree can expect to pay over $275,000 in future healthcare expenses. Have you budgeted for that in your retirement planning? If not, that expense could cut into other things that you had hoped to spend your money on.

2. Your Taxes May Not Decrease

You’re no longer earning a salary, so your tax payments will decrease, right? Not so fast. You’re still going to be earning income, whether it’s from Social Security, pensions, investment income, or distributions from retirement accounts. If you don’t plan correctly to try to minimize your tax obligations, you may end up paying more to Uncle Sam than you had hoped to. Then there’s the fact that we don’t know what tax rates will be like in the future.

Right now Roth retirement accounts aren’t taxed at the time of distribution. That’s because, unlike normal 401(k) and IRA accounts, Roth accounts are funded with post-tax income. But that doesn’t mean that Roth accounts will always remain tax-free at distribution time. With a federal government that is accumulating debt at an astronomical pace, don’t be surprised to see some sort of levy placed on Roth accounts in the future.

Then there’s the problem of mandatory distribution from traditional 401(k) and IRA accounts. In the year you turn 70 ½ you’ll have to start taking minimum mandatory distributions from those accounts. If you have significant amounts of money in those types of accounts, you may be forced to withdraw more money than you had expected, leading to higher than expected income and therefore larger than expected tax payments. And because your income is now higher than you expected, you may end up paying more in taxes on your Social Security payments, and you’ll also have to pay higher Medicare premiums. So make sure that you plan carefully to keep from paying more in taxes than you absolutely have to.

3. Your Lifestyle May Become More Expensive

The expectation of many financial planners is that retirees will become less busy in retirement and thus will spend less money. Mortgages should also be paid off by now, children should be out of school, and so monthly expenses should be minimized. Most financial planners say that you need to estimate spending about 80 percent of what you currently are spending in order to maintain your current standard of living.

But many households remain in debt into retirement. If you have large amounts of credit card debt, or you’re helping children and grandchildren pay for school or buy a house, you may need to adjust your expectations of future spending and thus manage your investments accordingly.

Many retirees may also want to spend time doing the things they always wanted to do but couldn’t, such as travel. A two-week vacation to Europe could easily set you back $5,000-6,000 or more. A handful of vacations like that each year and you’re starting to eat into your savings pretty severely.

Others may want to purchase a vacation home, and seeing that huge balance in your retirement accounts makes you think that you can do it. But taking out a second mortgage, paying property taxes on a second home, plus the maintenance and upkeep all will contribute to your monthly expenses and can leave you spending more money in retirement than while you were working.

The Solution

As always, it’s better to save more money and not have to use it than not to save enough money and be hurting for money once you’ve quit your job. And that means making the right investment decisions now to make sure that you not only have enough money in retirement but also so that your assets continue working for you into retirement.

One of the best assets for that purpose is gold, which continues to appreciate year over year over the long term, defying financial downturns and acting as a hedge against both inflation and financial crisis. In fact, over the past nearly 50 years gold has outperformed stock markets in terms of annualized growth. And with a gold IRA you can invest in gold while still maintaining all the same tax advantages of a traditional IRA. You can even roll over existing 401(k) and IRA assets into a gold IRA tax-free.

But regardless of what you invest in, make sure that you don’t underestimate your spending needs in retirement. Even investing in gold won’t make up for an investment plan that leaves you tens of thousands or hundreds of thousands of dollars in the hole come retirement. Overestimate your spending so that you’ll come out ahead and not be left scrambling to pay for vital needs in retirement.