The Expenses Retirees Always Overestimate — and They’re Costing Them Thousands
Written by
Laura Gariepy
Edited by
Zuri Anderson
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Financial horror stories about retirees running out of money during their golden years are unfortunately all too common. Many people underestimate how much their retirement lifestyle will cost them, putting them in a difficult position late in life.
However, some retirees do the opposite, overestimating how much they’ll need to cover their expenses. We asked several certified financial planners (CFPs®) about the types of expenses retirees most often overestimate. Keep reading to see what they had to say.
The Expenses
Interestingly, according to the financial professionals, health care, travel, and home and auto maintenance top the list of expenses retirees tend to overestimate. Here are the details.
Health Care
“People just are paralyzed by the unknowns of health care in retirement. There have been studies by Fidelity that the average healthcare costs in retirement are [over] $250,000. That’s a big number, but that’s also over a lifetime, which could be 15, 20 years or longer,” said Kyle Newell, owner of Newell Wealth Management.
“[Retirees] hear those numbers and think that if they go to the hospital, they are going to have to pay tens of thousands of dollars. In reality, Medicare or Medicare Advantage ends up covering quite a bit,” Newell continued.
Travel
Michelle Petrowski, owner of Being In Abundance, said, “Most people picture their dream retirement — finally having the time to see the world, take the trips they’ve been putting off and visit the grandkids more often. They assume they’ll travel more and keep up that pace for years, sometimes even building inflation into those numbers, which just adds to the overestimation.”
“But what actually happens is that life shifts,” continued Petrowski. “People often don’t realize there’s a natural spending pattern in retirement — the ‘Go-Go’ years early on, then the ‘Slow-Go’ years later, and eventually there’s what’s known as the ‘No-Go’ years. Travel and discretionary spending usually drop off over time, but many plans don’t reflect that as we’re so excited about the adventures we’ll have in retirement and our next chapter.”
Home and Car Maintenance
“When folks retire, they often plan for the same or increased home and auto maintenance expenses like oil changes, furnace repairs, etc. In reality, these costs often decrease in retirement,” said Benjamin Simerly, founder of Lakehouse Family Wealth.
“As individuals and couples age, they often drive fewer miles, reduce the use of air conditioning and change other habits that lead to significantly lower maintenance costs. Often, couples even decide to forgo maintenance when needed and let the next owner deal with it. Retirement becomes about convenience and time, focusing on living, and less about the ‘to-do’ list,” explained Simerly.
Key Considerations
As you prepare for and go through retirement, follow these best practices to create and stick to a realistic budget for all of your expenses.
Research True Costs
Dig deeper than the financial headlines that are designed to induce emotion (mainly fear) to learn how much you really need to save. For instance, “Fidelity estimates the national [health care cost] average to be about $6,500 per year per person, which includes premiums and out-of-pocket expenses. So one could use that as a base case to plan to have enough saved to cover that every year,” said Newell.
Newell continued, “It’s important for retirees to understand what their out-of-pocket maximums may be. Ultimately, though, these numbers are doable and something many people overestimate because they think of worst-case possible scenarios.”
Pro tip: Don’t confuse health care costs with long-term care costs. While insurance may be able to help cover some long-term care expenses, you could be on the hook for a significant sum — especially if you don’t have a long-term care insurance policy.
Find Ways To Save
Knowing how to stretch each retirement dollar further means you’ll need fewer of them to live comfortably and happily. For instance, you can travel a lot more if you skip fancy tourist traps.
“Often, savvy travelers find ways to live like a local wherever they go, and save significant amounts of money in the process. Focusing on the destination itself is not only more fulfilling but often far less expensive,” said Simerly.
He also encourages retirees to join groups for seniors to make friends and take advantage of discounts on activities.
“Life can become more fun and cost less,” Simerly said.
Revisit Your Budget Regularly
The budget you create for 65-year-old you likely won’t apply to 85-year-old you.
“The traditional financial planning model assumes a very flat rate of spending throughout retirement adjusted for inflation. But that’s not really how life works. So, people who went with this flat rate spending model often find they overestimated their expenses a few years into retirement,” explained R.J. Weiss, founder of The Ways To Wealth.
“To help keep spending more in line with reality, I’d advise folks to break retirement into phases — early, middle, and later years — and plan for each one differently. I believe the goal is a plan that matches how life is really unfolding, not just how you pictured it on day one,” Petrowski said.
“Overestimating isn’t necessarily a bad thing — it can create a nice cushion — but if it leads to being overly cautious, it can mean missing out on other experiences you could have enjoyed and didn’t.”
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