3 Costs That Might Stretch Your Retirement Income Thin — and How to Prepare

Before you retire, there are a few key financial moves you should make. You should review your IRA or 401(k) balance and figure out how much annual income your savings will provide. You should also decide when you’ll claim Social Security so you’ll know how much monthly income your benefits will give you.

On top of that, it’s important to build a realistic retirement budget. But to do that, you need to account for some key costs that may end up being more than you’ve bargained for. Here are three to prepare for specifically.

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1. Housing costs

If you bought your home years ago, your mortgage may be paid off in time for retirement. But while that can certainly free up some room in your budget, owning a home still comes with ongoing costs that could rise during your senior years, like property taxes, insurance, and maintenance.

Plus, if you’ve owned your home long enough for it to be paid off, chances are that some of its systems are aging. You may need a new roof, HVAC system, or plumbing that could cost thousands of dollars, throwing your budget off course — especially since those repairs could come out of the blue.

To prepare for those extra housing costs, maintain a solid cash cushion. That way, you won’t end up in a situation where you need to pay for a repair that can’t wait at a time when your portfolio has lost value in a market downturn.

Also, consider whether downsizing makes sense given your financial situation. A smaller home may come with fewer expenses.

2. Healthcare costs

Even though Medicare might cover a number of medical expenses, that doesn’t mean healthcare will be free. You’ll still need to budget for premiums, deductibles, copays, dental care, vision care, and other services Medicare doesn’t cover.

If your health insurance is compatible with a health savings account (HSA), it could pay to fund one and reserve the money for retirement. That way, you’ll have a dedicated pool of funds you can dip into when medical costs arise.

It could also make sense to buy a Medigap plan once you enroll in Medicare. Medigap is supplemental insurance that can pick up costs like coinsurance and deductibles that enrollees are typically liable for.

Medigap won’t cover expenses Medicare doesn’t cover, like dental care. And it will require a separate monthly premium, so that’s a cost to factor in.

But do remember that Medicare does not put a cap on out-of-pocket spending. Buying a Medigap plan could end up saving you money if you use your Medicare benefits a lot.

3. The cost of keeping busy

Many people spend years looking forward to travel, hobbies, and other such activities in retirement. But staying busy often comes with a price tag.

When you’re working, your weeks are mostly occupied. When you need to entertain yourself seven days a week, the costs can quickly add up.

And even seemingly cheap activities can be deceptively expensive. Gardening, for example, requires you to buy supplies. Hiking may require you to buy boots, poles, and other equipment.

Make sure to build room into your retirement budget for leisure spending. And if your budget can’t support as many activities as you’d like, try to find ways to keep busy on the cheap or for free, such as volunteering for an organization you care about or organizing a book club you and your fellow members take turns hosting.

The last thing you want to do in retirement is constantly worry about money. By planning ahead for housing, healthcare, and the cost of staying active, you can put yourself in a stronger position to tackle those expenses with less stress.

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