Even though your paychecks stop in retirement, your bills and expenses certainly do not. While many focus on the total dollar amount they’ll need saved for retirement, it’s equally—if not more—important to plan for the largest expenses you’ll face. Proper planning can help you avoid financial surprises and reduce the impact of these costs on your golden years.
In this guide, we’ll explore the three largest expenses most retirees encounter—taxes, healthcare, and housing—and practical ways to prepare for and even reduce these costs.
1. Taxes: Your Largest Lifetime Expense
Taxes don’t end in retirement. In fact, they often remain one of your biggest expenses. From income taxes on withdrawals to property taxes and capital gains taxes, understanding your tax liability in retirement is critical.
Know Your Retirement Tax Buckets
By the time you retire, it’s ideal to have built up three distinct tax buckets to pull from:
Tax-Deferred Accounts
Examples: 401(k)s, traditional IRAs
Contributions were tax-deductible, but withdrawals are taxed as ordinary income.
Taxable Accounts
Examples: Brokerage accounts, bank savings
Interest, dividends, and capital gains are taxed annually or when realized.
Tax-Free Accounts
Examples: Roth IRAs, Health Savings Accounts (HSAs)
Contributions are made after taxes, but qualified withdrawals are tax-free.
Strategies to Reduce Taxes in Retirement
Roth Conversions
Convert funds from traditional accounts to Roth accounts early in retirement, when your income and tax rate may be lower.
Pay taxes now to avoid potentially higher taxes on required minimum distributions (RMDs) later.
Tax Gain Harvesting
Purposefully sell investments in taxable accounts while in the 0% long-term capital gains tax bracket.
Repurchase the investments to lock in a tax-free cost basis.
Plan Social Security Timing
Up to 85% of Social Security benefits can be taxable, depending on your provisional income.
Delaying benefits and managing withdrawals from other accounts can help keep your taxable income lower.
Pro Tip: Taxes also influence other costs, such as Medicare premiums. Planning ahead can reduce the ripple effects of taxable income.
2. Healthcare Costs: A Growing Burden
Healthcare is a significant expense in retirement, often underestimated by those entering this phase of life.
Understanding the Costs
A 65-year-old retiree can expect to spend an average of $165,000 on healthcare costs throughout retirement, according to Fidelity.
Medicare doesn’t cover all expenses. For example, you’ll pay at least $174.79 per month in premiums, and higher-income earners face surcharges based on Modified Adjusted Gross Income (MAGI).
Ways to Manage Healthcare Expenses
Health Savings Accounts (HSAs)
Contributions are tax-deductible, growth is tax-free, and qualified medical expense withdrawals are tax-free.
After age 65, withdrawals for non-medical purposes are taxed like a traditional IRA but without penalties.
Medigap or Medicare Advantage Policies
These plans cover costs that Medicare doesn’t, such as deductibles and coinsurance.
Long-Term Care Planning
Over 50% of individuals over age 65 will need long-term care, with a median cost of $108,000 per year for a private nursing home room (2023).
Options include:
Long-Term Care Insurance: Protects against these costs but can have high and rising premiums.
Reverse Mortgages: Taps into home equity for care expenses.
Self-Insuring: Setting aside dedicated funds for potential long-term care.
3. Housing: A Cost That Persists
Even if your mortgage is paid off, housing remains a significant expense in retirement.
Key Housing Costs
Property Taxes: Often increase over time.
Insurance: Including homeowners and flood insurance.
Maintenance: Aging homes require repairs like roof replacements, HVAC updates, and landscaping.
Strategies to Reduce Housing Expenses
Downsizing
Move to a smaller, more manageable home with lower taxes and maintenance costs.
Relocating
Consider moving to a lower-cost area or even another country with a lower cost of living.
Pro Tip: Evaluate the full tax picture in your new location, including property and sales taxes, not just state income taxes.
Renting in Retirement
Provides flexibility for those who want to travel or avoid maintenance responsibilities.
Example: Retirees in states like Texas may save on income taxes but face higher property taxes. Always weigh all factors before relocating.
Putting It All Together: Planning for a Stress-Free Retirement
Steps to Take Today
Assess Your Current Spending:
Calculate your tax liability, healthcare costs, and housing expenses now to estimate your future needs.
Build Your Tax Buckets:
Diversify your retirement savings across tax-deferred, taxable, and tax-free accounts.
Review Your Healthcare Options:
Contribute to an HSA if eligible.
Research Medigap or Medicare Advantage plans.
Plan for Long-Term Care:
Consider insurance, reverse mortgages, or a dedicated investment portfolio for care expenses.
Evaluate Housing Needs:
Decide if downsizing or relocating aligns with your financial goals.
By preparing for these three major expenses—taxes, healthcare, and housing—you’ll be better positioned to enjoy a secure and stress-free retirement. Each category comes with opportunities to save and optimize, but proactive planning is key.
What’s your biggest concern about retirement expenses? Leave a comment below to start a discussion and share ideas.
For more tips on tax-efficient withdrawal strategies, check out this post. Let’s make retirement planning a journey toward confidence and clarity.
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About the author
Jake Skelhorn
Jake is a CFP Professional with a focus on planning for both traditional and early retirement. He’s a Florida native, growing up in Fort Lauderdale and now residing in Jacksonville with his husband Chris and their 120-lb “puppy” Barli. Jake enjoys cooking (favorite cuisine to make is Thai), traveling, and spending time with friends and family as much as possible.
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