4 Signs You’re Underestimating the Cost of Living in Retirement
Written by
Jake Safane
Edited by
Chris Cluff
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Planning for retirement can be a decades-long process, and many people struggle to accurately prepare themselves in terms of understanding the true costs of retirement.
While you can use rules of thumb, like trying to live off 4% of your retirement portfolio, that doesn’t necessarily mean you’re prepared for the full scope of expenses you’ll face in retirement.
Some of these costs are hard to pinpoint, but it can help to build some cushion into your retirement plan so you can make the cost of living in retirement more manageable. But you might be making some missteps now that could be an indicator of underestimating retirement costs.
Specifically, watch out for these four signs.
You’re Relying Only on Medicare
If your only plan to pay for healthcare in retirement is to rely on Medicare, that could be a sign you’re underestimating retirement living expenses, said Cliff Ambrose, founder and wealth manager at Apex Wealth.
That’s because Medicare typically provides only partial coverage of healthcare needs in retirement, especially later in life. For example, Medicare generally doesn’t cover areas like eye exams for glasses and most types of dental care. You also could need add-on coverage for areas like prescription drugs.
Relatedly, Medicare doesn’t cover long-term care expenses, like for home health aides or assisted living facilities. So if you’re underestimating long-term care expenses, that’s also a sign you’re underestimating the cost of living in retirement, Ambrose said.
You might think you won’t need this type of care, but 70% of individuals turning 65 in the U.S. will need at least some long-term care during their lifetimes, according to the Administration for Community Living.
You’re Not Accounting for Inflation
Another sign that you’re underestimating the cost of living in retirement is that you’re “disregarding inflation’s impact on living costs,” Ambrose said.
For example, if you plan to have a $5,000 monthly budget in retirement, that might work initially, but what would you do if your insurance premiums go up, the cost of home repairs increases, groceries get more expensive, etc.? The value of the dollar is less than half what it was 30 years ago, so figure that is what you have to look forward to 30 years from now.
Obviously, that means it will be hard to stick to a set retirement budget for all of your remaining years, so it could be helpful to build more adaptability into your budget.
Doing so could involve a mix of structuring your retirement portfolio to include some assets that typically hedge against inflation, so you could potentially have more retirement income to balance out higher costs. You also might make a plan for areas in your budget you can cut back on if your fixed costs increase due to inflation.
You’re Relying Solely on Fixed Income
Many retirees shift to a more conservative investment portfolio, such as moving from primarily stocks to primarily bonds, in order to get a more stable return. This is generally seen as a prudent way to avoid market swings that can wreck your retirement budget. But at the same time, it’s important to plan ahead for what fixed income investments could mean for your retirement cost of living.
“Relying solely on fixed income sources without considering unexpected costs or emergencies can indicate underestimation,” Ambrose said.
Similar to inflationary issues, if you’re budgeting, say, $5,000 per month that you’re getting from fixed-income yields, that might work well most of the time, but you also need to plan ahead for what you’ll do if you face issues like major home repairs.
In that case, you might plan ahead by having a solid emergency fund, with room in your budget to add to your emergency fund every month, in case it gets depleted. You also might hold a small allocation to assets like stocks that can potentially accumulate more than fixed income investments, which might give you a larger pool to draw from in an emergency.
You’re Not Accounting for a Long Life
Lastly, if you’re not accounting for a long life, that could be a sign you’re underestimating the cost of living in retirement, especially as medical improves and people potentially need their retirement income to last for more years.
Research from Corebridge Financial finds that 54% of Americans have a goal of living to 100. The most common expected age bracket to retire in is 65-69, the research also found.
“That could mean more than three decades in retirement,” said Terri Fiedler, president of retirement services at Corebridge Financial.
While a long retirement can be a wonderful experience, she said, it also means you need to plan ahead and take the right action before and during retirement.
Just 24% think their current retirement investments will sustain them for over 30 years or however long they need, Corebridge found. So, if you’re in this boat of wanting to live a long life but you’re not planning for your retirement portfolio to last long enough, you could be underestimating your retirement costs.
To remedy this, you might take steps like increasing your retirement savings, securing a passive income source before retiring or making a plan to work part time in retirement so you can draw down your retirement savings at a slower pace.
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