7 Overlooked Budget Items in Retirement

Key Points – 7 Overlooked Budget Items in Retirement

Health Care and Taxes Are Two of the Biggest Wealth-Eroding Factors in Retirement
What Insurance Needs Do You Have?
Budgeting for Unexpected Expenses
7 Minutes to Read | 24 Minutes to Watch

7 Overlooked Budget Items in Retirement

Many people at least have a rough idea of how much they spend each month. Money comes in from a paycheck and money goes out for various expenses. When it comes to planning for your retirement, it’s good practice to have a detailed understanding of how and where your money goes once it leaves your bank account.

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In retirement, some expenses won’t look a lot different than they do while you are working. For example, you probably won’t see a significant change in your utility bills, although they may be slightly higher if you are spending more time in your house. However, some of the things you spend money on will change quite a bit. Let’s explore some of the more commonly overlooked budget items in retirement.

1. Health Insurance

While you are working, you may be paying for health insurance through a group employer plan. Because the premium you pay is likely automatically deducted from your paycheck before hitting your checking account, it’s easy to forget about this expense. That may change in retirement. If you are retiring before the age of 65, you may need to obtain a separate health insurance policy, which could be hundreds of dollars each month.

Even when you become eligible for Medicare at the age of 65, you may be facing monthly premiums, deductibles, and other out-of-pocket expenses. A recent report by the Employee Benefit Research Institute found that “a couple with particularly high prescription drug expenditures will need to have saved $383,000 to have a 90 percent chance of having enough money to cover their health care costs in retirement.₁” While the study stated that was an extreme case, it’s still an alarming statistic.

Don’t Forget About Factoring in Inflation

We could easily list inflation as a separate overlooked budget item, but let’s talk specifically about inflation’s impact on health care costs compared to other expenses. When we’re building someone’s financial plan, we typically apply around a 4% inflation rate for their day-to-day expenses, but that doesn’t include health care costs.

Why’s that, you ask? Well, according to the Peterson-KFF Health System Tracker, the price of medical-related costs increased by 114.3% from 2000 to July 2023.₂ Meanwhile, consumer goods and services prices went up 80.8% over that same period. That data backs up why we inflate health care costs 6.5% to 7% on someone’s financial plan rather than 4%. The bottom line is that health insurance and inflation are budget items you should make sure not to overlook in retirement.

As you’re building your forward-looking financial plan, read through our Retirement Plan Checklist. It consists of 30 yes-or-no questions—many of them which are related to these overlooked budget items in retirement—that gauge your retirement readiness. It also includes age-and date-based timelines of critical retirement considerations. Download your copy below.

Retirement Plan Checklist

2. Taxes

In retirement, just because you may not have earned income does not mean you won’t be subject to federal (and possibly state) income taxes. When you take a withdrawal from tax-deferred accounts (such as an IRA, 401(k), or annuity), this income is generally considered taxable. You’ll want to make sure that you are working with a tax professional to run income tax projections each year, so you aren’t caught off guard in April when you file your tax return. Taxes are a remarkably important budget item for retirement to make sure you aren’t overlooking.

Forward-Looking Tax Planning

Suppose you’re using proactive tax planning strategies, like Roth conversions. In that case, you need to be aware of things like marginal and effective tax rates and other income “milestones” like the phasing out of certain deductions and tax credits.

Keep in mind that unless Congress steps in and makes a change, tax rates will go up in 2026 when the Tax Cuts and Jobs Act sunsets after December 31, 2025. Tax rates would revert to the higher rates of 2017. We’re also factoring in what happens when Required Minimum Distributions start for you. Do you know your required beginning date for RMDs? When the SECURE Act 2.0 became law on January 1, 2023, the RMD age changed from 72 to 73, and it will go up to 75 in 2033.

Another overlooked budget item in retirement that’s related to taxes is that up to 85% of your Social Security benefit can become taxable. The difference between the best and worst iteration of how you and your spouse claim Social Security can result in a substantial amount of retirement income.

Also, while you may not necessarily need to budget for this, you should be aware if you are a married couple that the taxes will potentially change drastically after the death of the first spouse when the surviving spouse files as a single tax filer. Taxes can be a huge wealth-eroding factor in retirement if they aren’t properly planned for. Download our Tax Reduction Strategies guide below to get a better understanding of what needs to be considered for your forward-looking tax plan.

Tax Reduction Strategies Guide

3. Mortgage and Escrow Payments

Even if you plan on paying off your mortgage at or before you retire, you’ll still be on the hook for your annual property taxes and your homeowner’s insurance policy premium. That’s another overlooked budget item in retirement that many people miss. While you have a mortgage, these amounts are typically additions to your monthly payment, so you may not know the exact amounts.

Refer to your most recent mortgage statement or call your lender and determine what amount of your monthly payment is being held in escrow to cover taxes and insurance. It’s a good idea to shop around for homeowner’s insurance from time to time.

This is another overlooked budget item in retirement where inflation needs to be understood as well. Many people have fixed-rate mortgages that typically span 15 or 30 years. Having a fixed rate means that your monthly mortgage payment won’t change, no matter the inflationary environment. Your mortgage has a finite ending date, so that needs to be outlined as such in your financial plan.

4. Long-Term Care Insurance Premiums

If you have a long-term care insurance policy, you should be aware that you may receive a notice of an increase in your annual premium at some point. While some policies are structured in a manner for you to pay a flat, level premium for a specified period, other policies have adjustable premiums.

Just like you may receive an increase in the cost of an auto policy in the future, the insurer of your long-term care insurance policy may need to raise their rates. It’s not unheard of for insurers to increase premiums by double digits, as long-term care costs continue to rise.

If you don’t have long-term care insurance and don’t think you’ll need it, consider these statistics from LongTermCare.gov.₃ Those who are 65 or older have nearly a 70% chance of requiring some form of long-term care. The duration of a long-term care stay tends to be longer for women (3.7 years) than men (2.2 years). And while more than 30% of people 65 or older won’t require a long-term care stay, 20% of them will need long-term care for five-plus years.

So, you need to consider paying an insurance company a premium to cover that risk or bear that risk on your own. Either way, it needs to be built into your plan.

5. Home Repairs and Remodeling

Nobody likes spending tens of thousands of dollars on a new roof or driveway, but these things will happen. When they occur in retirement, it can hurt more than while you’re working, especially if you’re on a fixed income. So, overlooking budget items like home repairs can definitely impact your retirement.

Make sure you plan on these large, one-off expenses in your retirement. You may also want to budget some funds for future remodeling projects, such as a bathroom or kitchen. In some circumstances, you may want to consider a home equity line of credit as opposed to taking a large withdrawal from an account that may generate a significant tax liability.

6. New Vehicles

Even if you plan to drive your car until the wheels fall off, you’ll want to plan on replacing at least one or two vehicles during your retirement. Depending on your vehicle of preference, this could be tens of thousands of dollars in retirement.

There’s also a good chance that at some point you’ll be faced with an invoice from your mechanic for hundreds or thousands of dollars when something inevitably breaks down. If you’re on a fixed income in retirement, a savings account can still be of use for expenses like these.

7. Gifting

The last overlooked budget item in retirement that we’ll cover is gifting. For those who are charitably inclined, you might want to incorporate some gifting into your retirement budgets. For example, if you are tithing while working, will you plan to continue to give a similar amount when you no longer have the earned income, or will you need to adjust?

In addition, there may be specific ways of giving financially to your important causes that could lead to tax benefits, such as Qualified Charitable Distributions for those who are 70½ or older. A QCD allows you to give up to $105,000 directly to charity from your IRA without it showing up on your tax return.

Also, if you want to help your family or friends with funding for educational expenses, you can make contributions to a 529 plan for them and potentially deduct some income from your state tax return.

Stop Overlooking These Budget Items in Retirement

We can go into much more detail on each of these overlooked budget items, but this is really the main takeaway. These overlooked budget items will all have different impacts on people as they’re going to and through retirement. That’s because no two people are the same. Everyone needs to factor these overlooked budget items in retirement and plan for them based on their individual needs, wants, and wishes.

If you have any questions about specific items that we addressed and how to plan for them, start a conversation with our team below.

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We don’t want you to be overlooking any of these budget items in retirement. Let’s get started on building you a financial plan that considers all these budget items and that gives you more confidence that you’re doing the right things with your money, freedom from financial stress, and time to spend doing the things you love.

7 Overlooked Budget Items in Retirement | Watch Guide

00:00 – Introduction
01:02 – 1. Healthcare
03:49 – 2. Taxes
07:18 – 3. Mortgage and Escrow Payments
08:45 – 4. Long-Term Care Insurance and Payments
11:47 – 5. Home Repairs and Remodels
14:05 – 6. New Vehicles
18:42 – 7. Gifts
21:10 – What We Learned Today

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[1] https://www.ebri.org/content/projected-savings-medicare-beneficiaries-need-for-health-expenses-remained-high-in-2022

[2] https://www.healthsystemtracker.org/brief/how-does-medical-inflation-compare-to-inflation-in-the-rest-of-the-economy/

[3] https://acl.gov/ltc/basic-needs/how-much-care-will-you-need#:~:text=Someone%20turning%20age%2065%20today,for%20longer%20than%205%20years

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.