4 Retirement Expenses That May Surprise You (And How to Prepare for Them)
Share this article
What we’ll cover:
- Medicare won’t cover all of your health care expenses in retirement
- Medigap plans, Medicare prescription drug coverage and HSAs might be good options to help you cover additional costs
- You’ll typically need to pay taxes on withdrawals from your retirement accounts
- Home and auto repairs can come up; try to avoid dipping into your investments to cover these costs
- Having either adult children or older parents moving back in could put a dent in your spending
When it comes to planning for retirement, most of us are probably planning to stash money away for basics like housing, transportation and food. But there are a lot more expenses you may want or need to cover. Sure you’ll want to save for the fun stuff like travel (hello unlimited vacation time!), but unexpected retirement costs could quickly drain your savings and even have an impact on the financial legacy you plan to leave behind.
So what kind of expenses are we talking about? We’ve got four.
1. Health care retirement expenses
You are eligible to sign up for Medicare when you turn 65 – but keep in mind this health care program doesn’t fully cover everything (hearing aids and dental work are just two examples). And even when it comes to expenses Medicare does address, many people may still want to get supplemental health insurance and prescription drug coverage.
There are several options for you to consider for dealing with health care retirement expenses.
- Medigap plans. These are standardized policies offered by private insurance companies. The policies must follow both federal and state laws and be clearly identified as "Medicare Supplemental Insurance." However, costs and benefits can vary, so it's good to carefully compare plans.
- Medicare prescription drug coverage. This insurance covers both brand-name and generic prescription drugs at participating pharmacies in your area, and helps protect you against unexpected drug costs. This coverage is offered by insurance companies and private companies approved by Medicare. Once again, there are a number of plans to choose from, so it's wise to comparison shop.
- Health Savings Account (HSA). If you’re working and currently have a high-deductible health insurance plan (an HDHP), you can open a health savings account (HSA) to save tax-deductible money for future expenses. When you use these funds, make sure it’s for qualified medical expenses, otherwise you’ll have to pay income tax on top of a 20% penalty (ouch). However, once you are 65 you can withdraw without a penalty for any expense.
There’s also this additional, and critical, health care item you need to prepare for: long-term care for your personal needs (e.g., bathing, dressing, eating and taking medications). Medicare doesn’t cover it, and the Department of Health and Human Services estimates that approximately 70% of older Americans will need long-term care. The government estimates that the average duration of long-term care services is two years and the average total cost is $138,000 – so it’s important to plan ahead.
One way to prepare for long-term care expenses is to build these retirement costs into your budget. For instance, setting aside at least some money in a high-yield savings account to cover these potential costs can make it easier if you do eventually need long-term care. And if you don’t, you can always withdraw that money for something fun like a vacation with the grandkids.
Another option is to invest in long-term care insurance. It’s cheaper and easier to enroll sooner rather than later in these programs (if you wait too long, you could either be denied coverage altogether or charged high premiums).
2. Taxes in retirement
You typically need to pay income taxes on your retirement account withdrawals – unless they’re stashed in a Roth IRA or Roth 401(k) and you’ve followed the rules of that plan. And, some Social Security recipients may owe taxes on their benefits at the state and federal levels. Most states don’t touch your Social Security check, but 13 do. Even if you live in a state that doesn’t tax Social Security benefits, the federal government still might; more than 40% of current beneficiaries pay income taxes on a portion of their benefits.
The exact amount you'll pay in taxes depends on how much you're withdrawing and what your combined retirement income will be. A number of tax management strategies might be able to mitigate your retirement tax bill, so working with a tax professional and taxes can help ensure that they don’t act as a drain on your retirement account.
3. Car and home maintenance
Many retirees plan for housing and transportation costs – paying off a mortgage or car loan, or downsizing to lower property tax bills and homeowner insurance. Still, things go wrong, and unexpected categories of expenses that popped up before you retired can still be an issue once you’ve stopped working.
Your car could need new brakes or develop a transmission problem. You may need to replace a major home appliance, repair a roof or deal with flood damage. Retirees can plan ahead for these expenses – again by setting up a separate savings account, or saving more for their non-working days.
It may be tempting to think you can use money from your investments to cover these types of costs, but if the value of those investments have decreased, that could trigger what’s called sequence-of-returns risk. That means if you sell shares at a time when the value of your investments have decreased, you may have to sell more shares to get the amount of cash you need. So you may have trouble catching up to the value of your initial investments.
4. Boomerang kids and elderly parents moving back in
Young adults are staying in school longer and delaying marriage – and more than one in three of those aged 18 to 34 are living in their parent’s home, according to the US Census Bureau. And it’s not just adult children moving in with retirees. The Pew Research Center found that 14% of adults living in a shared household in 2018 were parents who moved back in with their adult children.
From a financial perspective, moving back in with mom and dad can provide millennials with an opportunity to start saving money toward financial independence. From an elderly parent’s vantage, moving back in with family may be a preferred option if they didn’t plan adequately for long-term care.
For retirees, having others at home can raise a number of expenses from groceries to car and medical insurance. Whatever the circumstances, parents may want to consider setting expectations for how long financial support for their children will continue, and when children will need to pay their own way. And for those with elder parents living at home, having open discussions (while easier said than done) might help you anticipate what sort of financial support you may have to provide your parents as they age.
And finally: Unexpected expenses to be aware of
Even the best plans can change, and some, like divorce or bringing grandkids into the house full time, could mean rethinking retirement on several levels. Divorce could mean a smaller pool of retirement funds, which means less money to invest and less time for it to grow, as well as a new budget when it comes expenses like housing, food and health care.
If the financial costs of supporting your grandchildren look like they’ll be as extensive as the costs of raising your own kids, the financial impact could be even more drastic. It could also mean repurposing money you’d hoped to be an inheritance to support the here-and-now.
This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation to buy or sell securities, or of an account type, securities transaction, or investment strategy. This article was prepared by and approved by Marcus by Goldman Sachs®, but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC are or any of their affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.
Investment products are: NOT FDIC INSURED ∙ NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, GOLDMAN SACHS BANK USA ∙ SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
4 min read
Connect with us on social media
Join our Marcus social media community, where we share content and inspiration to help improve your financial health. See you there!
