5 Costs of Retirement and How You Can Minimize Them

By on January 31, 2013

5 Costs of Retirement and How You Can Minimize Them People often think of their retirement years as years of relaxation and bliss.  Gardening, traveling, playing with the grand kids, and generally devoting time to the things that make us most happy are the themes of retirement.

We all think of 65 as the age of retirement, and in the past this was true.  In the 21st century however, retiring at 65 is becoming a luxury rather than a given.  After working hard for your entire life, it would be nice to think that you can live out your dreams while you are still physically able to do so.  The reality is that many seniors find that they cannot afford to retire at 65, turning these dream years into a nightmare.

Retirement is the perfect end to a life of work and fulfillment.  Below I am going to discuss 5 of the often unconsidered costs of retirement.  Then I will go on to let you know how you can minimize these retirement costs.  Ignore this at the peril of your golden years.

Insurance Costs

You certainly concern yourself with insurance costs when you are working.  And I'm sure you've seen how insurance costs have skyrocketed and coverage has declined over the past years.  Even with a generous employer sponsored plan, insurance is a major cost.

It would be nice to think that Medicare and Medicaid will cover all your insurance needs, but they are not keeping pace with insurance inflation.  You don't want to rely on the government to ensure your health once you're in retirement, especially since you may not want or be able to return to the workforce if necessary.

Also of concern is the cost of life insurance for those over 60.  A healthy male over the age of 60 will likely pay $100 per month or more for $100,000 of term life insurance coverage.  It's true that your life insurance coverage needs decline in your old age, but you still need some to ensure the livelihood of your spouse if you were to become deceased.

Tax Costs

The saying is that the only sure things in life are taxes and death.  Insurance covered the death part and now we are going to talk about the certainty of taxes.

Some people believe that their tax burden will decrease once they reach retirement age, but this is often untrue.  Even if your income is lower in retirement, your taxes could still take up a huge chunk of your money.  There are several deductions that most of us benefit from during our younger years that are no longer applicable once we are retired.  Consider the following:

Dependent Deductions

As your children grow up and move out of the house you lose the dependent deductions that were saving you $1000 per child.  Maybe you are long past this point, but with people having children at older ages this is something to consider.

Mortgage Deduction

Chances are that by the time you retire your mortgage will be paid off or very close to that point.  Once you pay off the mortgage, you no longer have the opportunity to deduct your mortgage interest payments.

Retirement Plan Deductions

When you are working, you most likely contribute to either a 401(k) or an IRA.  These payments are deducted from your income, meaning you don't pay taxes on them.  Once you retire you will no longer be contributing, meaning you lose this valuable deduction.  Even worse, you will begin withdrawing the money you placed in these tax shelters over the years and you will have to pay taxes on the withdrawals.

Inflation Costs

I'm sure you are familiar with inflation.  It is the rising cost of services and goods as time passes.  While you are working, your salary typically keeps pace with inflation or even exceeds it.  This gives you greater spending power over time.

This is not the case when you are retired.  Once you retire you are generally on a fairly fixed income.  Sure your Social Security payments may increase, but they typically do not keep pace with inflation.

To get an idea of how inflation can influence your spending power, let's look an example of a person who was born in 1948 and will turn 65 this year.  In 1948 a dollar was worth $1.  In today's world, it takes $9.53 to equal the purchasing power of that 1948 dollar (based on CPI data from the Bureau of Labor Statistics).

Basically this means you will need more money each year just to maintain your standard of living.

Retirement Savings

Related to inflation is the amount of your retirement savings.  Because inflation is making things more expensive each year, you will probably need much more than you think to avoid dipping into your retirement savings.

A $1 million nest egg yielding 5% will give you $50,000 per year.  While that might be sufficient now, it will not be even close to your needs 30 years in the future.  If the inflation rate continues at the same average as it has for the past 30 years you would need $121,000 per year, meaning you should actually have roughly $2.5 million in retirement savings.

Health Costs

Perhaps the largest jump in your expenses will be from health care costs.  As you age, you are more likely to become ill and to need a variety of treatments and surgeries.  All of these can add up to huge medical bills.

Based on data from Medicare, seniors currently use 28.5 prescriptions per year (including refills).  In addition, the average cost of prescription medications has increased by 48% from $28.50 in 1992 to $42.30 in 2000.  This is just prescriptions and doesn't include over the counter medicines, surgeries and doctors visits, and potential therapies.

How You Can Reduce Retirement Costs

All of the above costs can be minimized by taking certain actions now.  The younger you are the better you can utilize these actions, but even those close to retirement age can benefit by making some simple changes.

Save More Money

Now that you are aware of the impact inflation will have on your expenses and retirement savings, you need to start saving more.  The younger you are the more impact you will get from this thanks to the magic of compounding interest.  Increase your savings by as much as possible each year.

Start Planning Now

The earlier you begin planning for your retirement the better off you will be.  This includes your retirement savings and your insurance policies.  Buying an insurance policy when you are younger is going to save you a significant amount of money versus waiting until you are older.

Start to Take Better Care of Yourself

With health care likely to be the most expensive part of your retirement, it makes sense to take care of yourself physically and possibly avoid some lifestyle related diseases such as heart problems, diabetes, some cancers, and others.  Not only that, but by eating properly and exercising you will feel better, allowing you to get more enjoyment from your retirement years.

What do you think about these retirement costs and methods for minimizing them?  Do you have any additional recommendations to add to the conversation?  Leave a comment below and let us hear what you have to say about retirement costs.

Steve Walters
Steve Walters
Contributing Writer at ExcelLiving.com
Steve blogs about personal finance at his site Money Infant. After paying off over $40,000 in debt in less than 3 years, he and his wife sold all their stuff and moved across the world to Thailand with their 1 year old in tow. Needless to say it's been an adventure. He is also available for freelance writing assignments and can be contacted here
Steve Walters

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