Will You Be Able to Afford Your Dream Retirement?

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Many aspiring future retirees hear they need $1 million or more to retire successfully. The truth is that the amount you’ll need in retirement depends on your unique circumstances and can vary widely based on where you live, your lifestyle and your retirement income. It can be challenging to truly know your retirement number, and with so many factors like health care costs, taxes, inflation and personal lifestyle expenses, determining the exact amount you'll need may feel overwhelming.

On top of that, making mistakes in estimating how much money you need can devastate your financial security, leading to unexpected sacrifices or even running out of funds in your later years — no one dreams of trading their golden years for years tarnished by financial insecurity. Taking the time to evaluate your unique situation and get the right advice is essential to ensuring that the richness of your dream retirement life will become a reality.

Susan's story: Is $2 million enough?

Susan, a 62-year-old professional from Westchester, N.Y., worked diligently throughout her career, consistently saving into her 401(k). She recently hit a milestone of amassing $2 million in retirement savings. However, despite her financial discipline, Susan felt uneasy. Living in a high-cost area like Westchester and wanting to stay close to her kids, who were beginning their careers near New York City, she wondered, "Is $2 million enough for me? Am I missing any key expenses?"

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Questions like Susan's are common among retirees and pre-retirees. While $2 million might sound like plenty, the answer to whether it's sufficient depends on housing costs, health care needs, lifestyle costs and unexpected expenses. For many people, the amount that they have saved is not enough.

What expenses could you be missing?

According to the powerful 2024 Retirement Confidence Survey by the Employee Benefit Research Institute and Greenwald Research, over half of retirees admit that their overall expenses in retirement are far higher than they initially anticipated. Shockingly, more than a third report that their travel, entertainment or leisure expenses, alone, have surpassed their expectations, highlighting the financial surprises that can disrupt even the best-laid plans. Like Susan, many retirees overlook key expenses that can significantly impact their savings.

Unexpected expenses that might creep up in retirement and put your nest egg at risk could include housing, health care, entertainment or travel, adding up quickly. Preparing for these expenses can help you avoid surprises. Here's a roundup of the three biggest expenses in retirement that could eat into your nest egg.

1. Home sweet home

Planning for retirement requires careful attention to real estate taxes and rising rents, two factors that can quickly derail even the best financial plans. Property taxes can climb significantly over time, especially in high-growth areas. Retirees often need to pay more attention to how quickly these costs can strain fixed incomes, leaving them with fewer dollars for other essential expenses.

For renters, the risks are even more significant. In many parts of the country, rents are rising far faster than inflation — sometimes doubling or tripling the average annual rate — due to limited housing supply and soaring demand.

Living in the high-cost area of Westchester, Susan must pay close attention to the rising real estate taxes on her home. With average property taxes steadily increasing and spiking over 6% in the past year, these costs could become a significant burden over time. The situation is even more daunting for renters, as rental prices in this region have skyrocketed over the last decade, far outpacing inflation.

Without proactive planning, Susan could see these escalating housing expenses erode her savings, potentially compromising her financial security. Susan may want to investigate downsizing her home or moving to a more tax-friendly real estate property state that is still somewhat close to her kids, which could also help her stretch her retirement savings further.

2. An apple a day keeps the doctor away: Health care and dental

Medicare is a vital resource in retirement, but it doesn't cover everything — and the gaps can be financially devastating. According to Fidelity's Retiree Health Care Cost Estimate, the average retiree spends $165,000 on health care throughout retirement, including for premiums, prescriptions and out-of-pocket expenses — double what most expect. Retirees also report that health and dental expenses are, on average, 51% higher than they thought they would be.

For women, the health costs are even more significant. Women typically live longer than men, exposing them to higher lifetime health care expenses. Longer lifespans also increase the likelihood of chronic conditions and the need for long-term care — expenses that Medicare does not typically cover.

Susan's story highlights these concerns on a personal level. Diagnosed with breast cancer at age 50, Susan fought bravely through aggressive treatment and entered remission. However, she continues to worry about the risk of recurrence. The financial burden of such a diagnosis is significant, with out-of-pocket costs for all cancers ranging between $180 and $2,600 per month, depending on the stage and treatment type. In addition to doctor's care, many other expenses can add up when battling cancer, such as physical therapy, counseling, acupuncture and other wellness services to cope with chemo, radiation and surgery. Should Susan’s cancer return, these medical costs could escalate, potentially derailing her retirement plan.

Savvy retirees should prioritize addressing health care costs head on to ensure financial security in retirement. According to the U.S. Department of Health and Human Services, someone turning 65 today has nearly a 70% chance of needing long-term care, a service that can cost $10,000 to $15,000 per month and is not fully covered by Medicare. To prepare for these substantial expenses, retirees should build a financial cushion for unexpected health costs, explore supplemental insurance options such as Medigap plans and plan for the possibility of long-term care. These proactive steps are essential to managing the significant and often unpredictable financial demands of health care in retirement.

3. Lifestyle choices: More time equals more spending

In retirement, many people find that their travel, hobbies and dining expenses increase as they finally have the time and freedom to prioritize entertainment. Take Gillian, a friend of Susan’s who is a retired school administrator living in Pheonix. After retiring at 65, she checked off some long-held bucket list trips, traveling to Italy for a wine tour, cruising through Alaska and visiting her sister in Australia. Like many retirees, Gillian discovered that travel costs can peak in the early retirement years when health and energy levels are high.

These early retirement years, often called the "go-go years," are when retirees are most active and tend to indulge in experiences like international trips, luxury tours and quickly planned escapes. Over time, however, these expenses tend to decrease, particularly in retirees’ 80s and 90s, as physical limitations or a desire for a quieter lifestyle emerge.

Hobbies and dining often follow a similar pattern. Retirees may explore new interests in the first years of retirement, such as golfing, pickleball, painting or gardening, which usually involve upfront investments in equipment, classes, court fees or memberships. Susan observed closely, as this happened for Gillian as well. Gillian’s dining-out bills increased substantially post-retirement, as eating in restaurants became a much more frequent indulgence. Like many retirees, Gillian enjoyed meeting friends for coffee, lunches and dinners out or participating in food and wine events.

Understanding these spending patterns is crucial for effective retirement planning. Retirees should anticipate higher travel and entertainment costs early on, while accounting for how these expenses might taper off in later decades, noting that as entertainment costs drop, medical costs go up.

Taking control of your retirement

While figuring out your retirement number may seem daunting, there are numerous tools and resources available to help you calculate the amount of savings you need. The 2024 Retirement Confidence Survey found that 52% of workers who calculate their retirement needs save more and feel better about their finances. Here's how you can get started:

Revisit your budget. Regularly reviewing your expenses ensures your retirement plan aligns with your lifestyle. "Lifestyle creep" is real, where your standard of living rises slowly without you realizing it. What was a former luxury can become the norm in retirement. Tracking your spending and benchmarking it to the previous year will combat this natural and unconscious tendency and keep your spending sustainable.
Use a retirement calculator. Online tools can provide a personalized estimate based on your income, savings and goals. Bankrate's Retirement Plan Calculator is one such tool that can help you take stock of your situation and get the answers you need. Kiplinger.com also has a retirement calculator.
Consult a Certified Financial Planner (CFP®). Your financial adviser should work with you to help estimate your required retirement savings by modeling your current expenses and those in retirement with an additional focus on housing, health and leisure costs, as well as other unexpected expenses. Your financial plan is a living and breathing document, meaning your income, expenses and investment performance will change over time. As such, your plan should be recalculated and updated to reflect these changes, ensuring that you maintain your path toward ongoing financial security.

Back to Susan: Next steps

With the help of a CFP®, Susan analyzed her expenses and goals. She discovered that while her savings were substantial, she needed to account for rising health care costs and the potential need for long-term care, especially because of her previous medical history. By adjusting her spending, increasing her savings and exploring supplemental income options, she gained confidence in her plan to retire while also staying close to her kids.

Susan's story highlights that retirement planning is a highly personal journey. Whether you've saved $200,000 or $2 million, understanding your individual goals and needs is essential to making informed decisions and enjoying the retirement you've worked hard to achieve. Calculating your retirement number is the first step toward financial peace of mind. With proper planning, retirees can confidently embrace their golden years and have the retirement lifestyle they are hoping for.

Disclaimer

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.

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Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded over 20 years ago. She is a Certified Financial Planner® (CFP®), Certified Divorce Financial Analyst® (CDFA®), as well as a Certified Estate and Trust Specialist (CES™), who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 25,000 women.