Why Retirement is Perhaps More Expensive Than You Think

Despite the scary headline of this article, the good news is that 70% of workers aged 25+ feel confident they’ll have enough money to live comfortably in retirement (according to the most recent Retirement Confidence survey published by the Employee Benefits Research Institute).

The bad news? Only 44% of respondents have considered how much monthly income they’ll actually need—and only about 48% have attempted to calculate the same.

Regardless of how much (or little) you’ve done to prepare, know that retirement will likely cost you more than you think. Here’s why.

Despite a recent decline in longevity, we’re living longer than ever before

Life expectancy was trending upward—at least until COVID-19 hit, that is. In fact, the Centers for Disease Control and Prevention (CDC) reported that 2021 marked the first time in the last 100 years that life expectancy rates dropped in consecutive years. Nevertheless, the CDC claims women are still expected to live an average of 79.1 years while their male counterparts have a life expectancy of 73.2 years.

The Social Security Administration predicts even longer life expectancies, stating a 65-year-old can expect to live an additional 19 to 21.5 years—a drastic difference from just 60 years ago when a 65-year-old man was predicted to live for 13 more years (17 more for a woman of the same age), on average.

No matter the data source, there’s no denying we’re living longer than previous generations and will therefore require more money to see us through those extra years.

Medical expenses are increasing

Fidelity recently reported that an average couple turning 65 today would need to spend almost $315,000 in after-tax money to cover healthcare expenses in retirement. This number is even more alarming when you compare that to a 2010 Boston College Center for Retirement Research (CRR) study that claimed the average 65-year-old couple could expect to spend $197,000 over their lifetime (with a 5% chance this could exceed $311,000). Neither estimate accounts for long-term care expenses, which aren’t insignificant.

Unfortunately, the concerning trend is unlikely to change—especially when you analyze the demographics of American citizens (hint: we’re an aging population). The Congressional Budget Office projects the “65 or older” age segment will outpace the growth of younger age groups for a very long time. Consequently, the additional demand for healthcare services will help fuel price increases.

Medicare doesn’t cover as much as you think

Medicare isn’t free. Though Part A (hospital insurance) premiums generally are, you may encounter deductibles if you’re hospitalized. Most people pay a monthly premium for Part B (medical insurance) that starts at $164.90 and can rise as high as $560.50, depending on your income.

Moreover, Original Medicare (Parts A & B) doesn’t cover everything. Therefore, you’ll need additional Medicare components (and thus pay more) for services such as vision, dental, hearing, and prescription drugs.

Medicare also only covers long-term care (LTC) in few circumstances, and purchasing an LTC policy is sometimes expensive.

For example, a recent American Association for Long-Term Care Insurance (AALTCI) study reports the average annual cost for a 55-year-old male is $2,220 (for a policy covering $165,000 in benefits with a 3% growth rate to account for inflation). This same policy costs more for a 55-year-old woman ($3,700), as women tend to live longer than their male counterparts and thus file more frequent claims. Fast forward ten years in age, and the annual price for the same policy increases to $3,135 (males) and $5,265 (females).

Should you forego this approach, you can take out an insurance rider (also not inexpensive) or self-fund your LTC expenses but run the risk of paying even more.

You can get hit with Medicare surcharges

IRMAA—income-related monthly adjustment amount—is the additional amount you may need to pay along with your Medicare premiums.

This surcharge is calculated based on tax returns you filed two years prior: meaning your 2023 income determines your IRMAA in 2025, your 2024 income determines your IRMAA in 2026, and so on. For those unfamiliar with IRMAA, this two-year lag can create unpleasant surprises when you first enroll in Medicare—especially if your income declines substantially after you retire.

Housing expenses won’t disappear in retirement

According to the latest Consumer Expenditure survey from the U.S. Bureau of Labor Statistics, housing—which includes mortgage, rent, property tax, insurance, and maintenance/repair costs—is the most significant expense for retirees. The average retiree household pays an average of $18,872 per year ($1,573 per month) in housing expenses, representing over 36% of their annual expenditures. Several reasons feed into these hefty costs:

Less aversion to mortgage debt
A recent report by Harvard’s Joint Center for Housing Studies claims that 46% of homeowners between the ages of 65 and 79 (and one in every four people aged 80+) are still paying off a mortgage. This is a marked difference from a few decades prior, as 34% of those aged 65-79 (and 3% aged 80+) had mortgages in 1990.

Downsizing is not as helpful as predicted
It’s common for people to assume that selling their home will help finance a good chunk of their retirement, especially when they plan to buy a smaller place. What’s also common, however, is that many who downsize often reap less than what they had anticipated.

While timing is partially to blame, unrealistic expectations regarding what your home is worth or could fetch on the open market can significantly contribute to misaligned expectations.

Unexpected home repairs and renovations
Whether you’re looking to remain in your current home as you age or move into a different one, you’ll unlikely avoid home repairs or renovations either way.

For example, keep in mind that most homes aren’t designed with old age in mind. Therefore, if you’ll eventually require wheelchair accessibility, need to expand a bathroom, and/or convert existing space so all key areas are on one level, expenses can quickly pile up. Even a brand-new home isn’t immune to unexpected accidents and weather damage that homeowner’s insurance may not cover.

Social Security taxes and a related lack of funding

Unfortunately, Uncle Sam doesn’t retire when you do. In fact, your Social Security benefits are liable to federal taxes depending on the earnings listed on your income tax return. If your total income exceeds $25,000 (for an individual) or $32,000 (for a married couple filing jointly) in 2023, you must pay federal taxes on your Social Security income (keep in mind some states charge additional SSI taxes as well). The amount of your benefits subject to taxation varies based on income level. That said, it’s critical to consider taxes when calculating your cash flow needs during retirement.

If you’re still several years away from retirement, consider preparing yourself for additional changes due to insufficient Social Security program funding. The most likely change? A higher full retirement age (when you’re entitled to receive full benefits) may occur at some point in the not-too-distant future.

In sum: why retirement is perhaps more expensive than you think

Regardless of how well-prepared you believe you are for retirement, it’s critical to understand how essential expenses—many of which you have little to no control over—can derail even the most thorough plans. That’s why it’s crucial to work with a qualified financial advisor who can help you identify a realistic retirement lifestyle and mitigate risks that can adversely impact the same.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.