7 Expenses That Will Drain Your Retirement Savings the Fastest

An older couple plans their finances and looks forward to retirement.
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You’re going to spend a good portion of your life working and saving for retirement. Once you reach that milestone, you want to feel confident that your nest egg is big enough to cover your needs in your golden years.

As you’re planning for retirement, it’s important to anticipate some of the costs that could eat into your savings. Here are seven expenses that can drain your retirement savings — and how to plan for them.

Healthcare

Even with Medicare, out-of-pocket healthcare expenses can be significant, according to Taylor Kovar, certified financial planner and CEO at The Money Couple and Kovar Wealth Management. “This includes costs for prescriptions, surgeries, and long-term care,” he said.

One estimate by HealthView Services Financial finds that a healthy 65-year-old couple who retired in 2021 will likely spend between $156,208 and $1 million on healthcare costs during retirement, depending on where and how long they live.

How To Plan: Kovar said it can be a good idea to have a health savings account (HSA) or a similar fund specifically for medical expenses. “Regularly reviewing your health insurance and considering supplemental insurance can also help mitigate these costs,” he added.

Homeownership

If you own a home, that can be another source of major expenses that eat into retirement funds. “As homes age, significant repairs like roof replacements or plumbing issues become more frequent,” Kovar said. From 2016 through 2020, Americans aged 65 and older spent an average of $16,880 per year on housing-related costs, according to the Bureau of Labor Statistics.

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How To Plan: Kovar recommends setting aside a home maintenance fund and conducting regular home inspections to help anticipate and spread out these costs.

Inflation

Inflation can have a significant impact on your future savings, since you’ll need to take larger withdrawals to make up for the higher cost of living, according to Jeff Busch, partner and investment advisor representative at Lift Financial. “This can be particularly troublesome if your portfolio is made up of fixed income strategies that don’t have the ability to keep up with inflation by increasing income overtime,” he said. 

How To Plan: To mitigate inflation, Busch said you may want to invest a portion of your portfolio in stocks that have historically provided better returns than bonds and cash. In general, he added, maintaining a diversified portfolio can be a big help in the long run.

Adult Children (and Their Children)

From student loans to cell phone bills, many retirees find themselves financially assisting their adult children, or even their grandchildren. A study by Merrill Lynch found that in 2018, 79% of parents were providing financial support to their adult children, contributing a combined total of $500 billion annually.

How To Plan: Kovar said it’s essential toset boundaries and have open financial discussions with family to ensure this support doesn’t derail retirement plans.

Taxes 

Once you start taking money out of your retirement accounts, you have to pay taxes on the distributions (in most cases). You may also have to pay taxes on a portion of your Social Security benefits. And since many retirees live on a fixed income, Busch said that high taxes will immediately lower their take-home income. That’s why tax planning is key for retirees.

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How To Plan: Busch said one way to help offset taxes in retirement is to convert your retirement accounts to tax-free accounts by using a Roth IRA conversion. “This strategy converts your taxable retirement accounts to tax-free withdrawals in the future,” he explained. “If you are still in the accumulation phase of planning, then you may want to consider making your retirement savings contributions to a tax-free investment such as a Roth IRA or Roth 401(k).” It can also be a good idea to speak with a professional to optimize your tax strategy.

Market Downturns 

In order to reach your retirement savings goals, you have to put some of your money in higher-risk market securities. While over time, this results in larger returns, short-term market downturns can have a significant impact on retirement savings, “especially if they occur shortly before or during retirement,” Busch said. 

How To Plan: If you are in retirement or very close to it, Busch suggested setting aside at least three years worth of income in an account with low volatility that can produce stable results. This gives the remaining assets in your portfolio time to recover through down markets, and avoids you having to liquidate assets at a loss to provide income. “Rebalancing your portfolio as needed will also help to keep your assets in line with your income needs, as well as manage market risk,” Busch added.

Longevity

For better or worse, people live much longer these days than they used to thanks to advances in healthcare and technology. A baby born in the U.S. in 2021 has an estimated life expectancy of just over 76 years, according to the National Center for Health Statistics

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While that might mean you get to spend more time enjoying your golden years, it also means you will have greater overall lifetime expenses. “With many people living into their 90s or even 100s, it’s crucial to plan for a longer retirement than you might expect,” Kovar said.

How To Plan: To combat the increased cost of living longer, Kovar recommends that retirees do the following:

  • Always have a rainy-day fund.
  • Periodically review and adjust your financial plans to account for life changes.
  • Consider long-term care insurance and other policies that can offset significant unexpected costs.
  • Continuously educate yourself about financial trends, especially those related to retirement. 

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