You may be able to reduce or eliminate some expenses when you retire including your mortgage, commuting costs, and office attire. But you are also likely to encounter new costs in retirement that you may be unprepared for. Here are five expenses that may appear suddenly or significantly increase from their current levels in retirement.
Medical expenses. Health care is likely to be one of your largest and most unpredictable retirement expenses. It’s difficult to determine exactly what conditions you might acquire and how much care or medication you will require to treat them. Start by estimating your annual Medicare premiums and likely out-of-pocket costs including deductibles, copays, and coinsurance. Purchasing a supplemental insurance policy that fills in some of the gaps in traditional Medicare coverage can help make retirement health care costs more predictable.
Home maintenance and repairs. Like you, your home will continue to age throughout your retirement. Try to take care of foreseeable major repairs before you retire to avoid sudden unexpected costs. You will continue to need an emergency fund in retirement in case your roof leaks or washing machine breaks down. You may also need to hire additional help with household chores if you become unable or unwilling to clean, shovel snow, maintain your yard, or other physically demanding tasks.
Your children and grandchildren. Your adult children might want to move back in with you after college or a job loss. And when grandchildren appear on the scene, you might want to pay for visits to see them more often or gifts for birthdays, graduations, and holidays.
Taxes. Many workers with 401(k) plans have been delaying paying income tax on a portion of their earnings for decades. In retirement, the tax bill will become due each time you make a withdrawal. And distributions from traditional 401(k)s and IRAs become required after age 70½. To lower your retirement tax bill, consider pre-paying the income tax on some of your retirement savings using a Roth 401(k) or Roth IRA.
Entertainment. You will have eight or more extra hours to fill each day in retirement. You may encounter new costs associated with an expensive hobby, such as joining a golf club. Or you may find yourself having more lunches out than you did while working in order to socialize and get out of the house. Many recent retirees also have a pent-up demand for travel. Make sure you factor travel and entertainment expenses into your retirement budget.