Why Many Pre-Retirees Underestimate Retirement Costs: 8 Overlooked Expenses
One of the biggest challenges in retirement planning is determining how much money you'll actually need. Many pre-retirees — Americans ages 45 and older who have not yet retired — assume their spending will drop once they stop working. A Northwestern Mutual study found that 55% of people in this group believe they will spend less in retirement than they do now — but that expectation may not hold up.
In reality, some retirees end up spending the same amount — or even more — than they did during their working years. Here's why, along with the often-overlooked costs that can throw off retirement budgets.
Why Retirement Spending Doesn't Always Decrease
Some expenses do shrink after retirement — but others can rise.
"Some day-to-day costs — commuting, work wardrobes or office lunches — will naturally disappear," said Keller Lindler, financial advisor at Northwestern Mutual. "However, pre-retirees frequently underestimate expenses that can actually grow over time."
Healthcare costs, for example, typically rise faster than general inflation. Retirees may also choose to travel, pursue hobbies or support family members in new ways.
"Ignoring those increases can leave a significant gap between expected and actual spending," Lindler said.
8 Common Retirement Costs Pre-Retirees Often Overlook
According to Lindler, these are some of the expenses pre-retirees are most likely to underestimate:
Health insurance premiums
Out-of-pocket medical expenses
Long-term care costs
Home maintenance
Utilities (which can spike once you're home full-time)
Property taxes
Income taxes must also be taken into account.
"Although retirement can reduce income-tax withholding, it may not lower your overall tax bill, especially if you're drawing from pre-tax retirement accounts," Lindler said.
Inflation is another "hidden" cost in retirement.
"Inflation can erode purchasing power, so today's monthly cost of living could look very different a decade from now," Lindler said.
How To Create a Realistic Retirement Budget
While it's impossible to predict every expense you'll face in retirement, creating a realistic budget can help you avoid unpleasant surprises. Lindler recommends starting with a close look at your current spending.
"Track every dollar for three to six months and categorize your spending into essentials and discretionary," she said.
Next, project how spending in those categories could change.
"For instance, estimate higher healthcare costs and factor in occasional large expenses, like new vehicles or home repairs," Lindler said.
Lindler also suggests using conservative inflation assumptions — around 3% to 4% annually — and applying guidelines such as the 4% Rule or the 25x Rule, which calls for saving 25 times your expected annual spending, as high-level checks.
Finally, working with a trusted financial advisor can help test your plan against market downturns and longevity risks.
"A dynamic, written budget that's updated annually will give you confidence that your retirement spending is both realistic and resilient," Lindler said.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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