Planning for Retirement? You're Probably Underestimating Your Spending

It's only too easy to overlook several expenses when you sit down to add up what you need for a happy, healthy retirement.

For many, making it to retirement feels like crossing the finish line of a marathon. With their career behind them, they hopefully will be able to stretch out, relax and float comfortably into the sunset. But there’s another leg of the race to be run, and this one’s a little slower paced but possibly just as long as the first.

People are living longer, compared to previous generations, meaning retirements last longer on average. The Social Security Administration even has a life expectancy calculator showing a trend that the longer someone lives, the more life expectancy increases (for example, a 65-year-old man has a life expectancy of 84, but if he lives to 70, his life expectancy increases to 85.5). And according to research, the earlier someone retires, the longer they’ll live.

These are broad figures and trends, of course that don’t take into account an individual’s health and a slew of other factors. The main takeaway from a financial planning perspective, however, is that you should anticipate a long retirement when preparing for that stage of your life. That makes it even more important to understand your cash flow and map out your expenses.

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Unfortunately, as we see frequently at our firm, people completely underestimate their post-retirement spending, failing to recognize many additional expenses they’ll incur after ending their employment or selling their business. The common assumption is that as you get older, you spend less — children leave the nest, for example, giving you fewer mouths to feed. But there are new expenses that come with retiring as well as current costs that you may not be accounting for.

Generally, there are four main types of expenses that soon-to-be or new retirees should plan for when building a budget. Understanding these areas will help ensure a comfortable retirement, while ignoring them means the next leg of the race could be a rough one.

1. Formerly business-subsidized expenses

For most workers, their job provides more than a salary. Many receive health benefits and life insurance, some get laptops, internet access and mobile devices, and others may have membership in industry groups or country clubs paid for through work. If an entrepreneur sold their own business, they would similarly lose the ability to pay for these types of expenses through their company.

To avoid sticker shock when you call it quits on your career, you must understand and catalog what expenses are covered by your employer or business. Some you might be able to part with, while others are a necessity for a comfortable retirement.

2. Overlooked expenses

When you’re bringing home a paycheck every other week and are busy raising a family or building a career, you don’t always think of precisely how you’re paying for things — just that it’s getting done. Because of that, you may not be aware of where all of your expenses are coming from when it’s time to retire. This makes it easy to underestimate your daily spending.

Frequently, people do the majority of their primary spending on one credit card, so when they approximate their spending for retirement, their thinking might go something like, “Well, I spend $8,000 a month on my American Express card, so therefore, I spend $100,000 a year.” But this leaves out spending on other credits cards — perhaps a rewards card used only for gas purchases — as well as regular services and charges that may be paid for by cash or check, such as landscaping, housekeeping and real estate taxes.

Before retirement, a thorough vetting of all your expenses, including from what sources they’re being paid, should be conducted to flesh out a comprehensive understanding of your retirement spending.

3. Health care expenses

Even if you reach retirement with a clean bill of health, you’re still probably going to spend a sizable portion of your income to keep it that way. A recent analysis found that a healthy male-female couple retiring at 65 this year should expect to spend $285,000 on health care over their retirement years.

While Medicare kicks in at 65 and covers many expenses, there are still many common health care costs that are uncovered, including dental and vision services, prescriptions drugs (unless you buy a supplemental plan, such as Part D) and long-term care. And out-of-pocket costs can skyrocket if a senior has a serious or chronic disease like cancer, diabetes or a heart condition.

Retiring early also creates issues. Because most people have had health insurance subsidized by their employers for all their working lives — and by their parents before that — they aren’t aware of the price of a la carte health care. A single brain MRI, for example, can run from $1,000 to $5,000. You can risk going without insurance, of course, but in the event of a serious accident or the diagnosis of a serious disease, having coverage can make an enormous difference in what you end up spending.

Budgeting for health care costs is wise at any time in your life. But when you’re older and more susceptible to medical issues, it’s essential.

4. Recurring non-recurring expenses

You buy a new car for $40,000. The next year, your failing retaining wall requires a $20,000 fix. A few years later, you finally get around to redoing the kitchen in a $70,000 upgrade. These are considered non-recurring expenses you commit to sparingly, or just once in your life, but big purchases and unexpected costs occur more often than you’d imagine.

It might sound hard to budget for something you don’t know is coming, but it’s a good practice to plan for at least one “one-time purchase” per year. If you don’t spend that money, you’re at least accounting for it — and it could make room for a bigger non-recurring expense the next year.

The road ahead

It might take some lengthy and tough discussions with your adviser, but building and adhering to a budget that accounts for these types of expenses will create long-term security in retirement. The people who have the most success in this process are those who think about it and make decisions well before they end their careers. Around five years prior is a good benchmark, because your spending habits likely won’t change drastically in that period, barring a major purchase like a new home or an unforeseen medical situation.

Either way, if you take a good look at the road ahead, you position yourself to make the next leg of the race a victory lap.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Matthew Helfrich, CFP
Partner and President, Waldron Private Wealth

Matt Helfrich is President of Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh, Pa. He leads Waldron's strategic vision, brand and value proposition and overall culture of the firm. Since 2002, Helfrich has served in a number of roles including: Chief Investment Strategist and Chief Investment Officer, where he was instrumental in creating and refining Waldron's investment discipline.