4 Major Expenses You Might Face in Retirement

Retirement planning is half savings and part guesswork. While many of your day-to-day expenses will remain the same, there are a few big-ticket items that can eat into your savings. The more you plan ahead of time, the more equipped you'll be to deal with the charges.

Here are four expenses to consider when you plan for retirement:

Medical Care

According to a 2021 Fidelity analysis, the average 65-year-old retired couple will require nearly $300,000 in after-tax savings to cover health-care costs in retirement. NerdWallet works with Fidelity. "And that's just for ordinary health care," adds Michelle Gessner, a Houston-based certified financial planner. "And that doesn't even include unforeseen chronic sickness treatment."

The costs you face will be determined by where you reside, how long you live, and your overall health. Taking care of your health and managing chronic illnesses such as Type 2 diabetes can help you save money.

Another surprise in health care is that Medicare rates are higher if your income exceeds a particular threshold. For example, if you're married filing jointly, and have a modified adjusted gross income of more than $182,000 in 2020, your Medicare Part B monthly premiums will be at least 40% higher. In 2022, the average premium for a couple will be around $4,000 per year.

"It creeps up on you," says Laurie Burkhardt, a CFP in Boston. "And, believe it or not, getting to that income level is simple when you're at the age where you're taking mandated IRA distributions."

Long-Term Care Services

Seniors who live to the age of 80 have a one-in-four probability of needing long-term care. And it's not cheap: an assisted living home costs $4,500 per month. And, while the average hourly wage for a home health caregiver is roughly $27, the costs pile up.

"If you only need a few hours of care per week, that's fairly reasonable," says Patti Black, a CFP in Birmingham, Alabama. "That calculation gets untenable as you require greater attention."

Certified financial planners can assist customers in projecting long-term care expenditures for a few years to guarantee their funds can handle it. "I discuss with clients whether long-term care insurance should be included in their financial plan to transfer some or all of this risk," Black says.

Dental Treatment

According to the Kaiser Family Foundation, the average senior on Medicare who used dental treatments paid roughly $900 out of pocket each year. Furthermore, one in every five Medicare enrolees spent more than $1,000.

Most traditional dental care is not covered by Original Medicare, and 47% of Medicare beneficiaries do not have dental insurance. However, seniors have greater risks from gum disease, tooth loss, and oral cancer, and finding comprehensive dental insurance can be challenging.

""Dental operations might be a nasty surprise," explains Burkhardt. "I'm going through it with my retired husband, who is getting a dental implant." He was astounded by how much he had to pay out of pocket."

Prescription Medications

Since 2015, at least 1 million Medicare Part D subscribers per year have had medication expenses that exceeded the catastrophic coverage threshold, which is $7,050 in 2022.

If you have a condition that necessitates specialty-tier drugs, such as cancer, multiple sclerosis, or hepatitis C, your out-of-pocket expenses can be exorbitant. Once you reach the catastrophic level, you'll pay a tiny coinsurance or copay for prescriptions, but there's no limit on out-of-pocket expenses under Medicare Part D, which can pile up if your drug is pricey.

"My father has rheumatoid arthritis, and his medications cost $6,000 a month," says Tess Zigo, a certified financial planner in Palm Harbor, Florida. "What retiree can afford $6,000 per month only for drugs?"

What Should I Do?

A financial planner who specializes in retirement needs can stress test your financial plan to account for health-related occurrences and other costs. If you have gaps in your coverage, they can advise you on how to meet unforeseen costs, such as long-term care insurance or a hybrid policy that includes life insurance with a long-term care rider.

Getting the correct insurance is also critical, from Medicare Supplement plans to dental and medication coverage.

"If the coverage is adequate, then those catastrophic expenses aren't that awful," says Dennis Nolte, a certified financial planner in Winter Park, Florida.

A skilled insurance broker can help you analyse your alternatives, and a Medicare consultant — or a call to your state's SHIP — can answer your questions regarding the best Medicare coverage for your circumstances.