In this article, we will explore what expenses you can expect in retirement and how to financially prepare for this next chapter of life. The goal is to better prepare for the financial realities of retirement and ensure that you can enjoy this new phase of life with greater peace of mind. 

Expenses in Retirement: What to Expect 

Housing 

Housing remains one of the largest expenses for retirees. According to Fidelity, housing costs can account for up to 42 percent of a retiree’s budget. This includes mortgage or rent payments, property taxes, and maintenance and repairs.  

These expenses can strain your retirement budget if you haven’t set aside a contingency fund for such events. Financial experts recommend maintaining an emergency fund specifically for home repairs and modifications to mitigate these unexpected costs. 

Many retirees opt to downsize or relocate to more affordable areas to manage these costs better.  

The ongoing responsibility of maintenance and repairs can be unpredictable. According to a report by the Society of Actuaries, major home repairs and upgrades were the most common shock that retirees say they had to face.  

Major repairs such as a roof replacement, plumbing issues, or HVAC system failures can be costly and often arise without warning.  

According to an analysis by Zillow and Thumbtack, when you add in all of the “hidden costs” that come with owning a home, the homeowners spend $14,000 per year on average. This includes costs such as mortgage payments, property taxes, insurance, HOA fees (where applicable), utilities, and home maintenance.  

When it comes to maintenance and upkeep, the average cost annually is $6,413, according to the same analysis. 

Below is a breakdown of the average costs of some of the most common repairs:   

The Society of Actuaries recommends that retirees “Evaluate whether current housing is affordable based on anticipated finances.” 

If you find that your housing expenses are eating up too much of your budget or you don’t have enough to cover needed repairs and upgrades, one option to consider is a reverse mortgage loan. A reverse mortgage will eliminate your monthly mortgage payment and allow you to access your home equity in the form of cash.   

Sources: 

https://www.thisoldhouse.com/roofing/reviews/cost-of-roof-repair

https://www.angi.com/articles/how-much-does-roof-replacement-cost.htm

https://www.angi.com/articles/how-much-will-plumbing-repair-cost.htm

https://www.forbes.com/home-improvement/painting/painting-house-exterior-cost

https://www.angi.com/articles/how-much-does-foundation-repair-cost.htm

https://www.angi.com/articles/how-much-does-water-heater-installation-cost.htm

https://www.angi.com/articles/how-much-hvac-repair-cost.htm

Dental Costs 

Even though dental costs are a medical expense, it deserves its own section because major dental expenses are the second most common financial shock that retirees report, right after major home repairs, according to the Society of Actuaries report on Shocks and the Unexpected: An Important Factor in Retirement.  

According to the report, 24 percent of retirees reported major dental expenses as one of the financial shocks they experienced.  

“Dental expenses are frequently unexpected and uninsured,” the Society of Actuaries explains.  

According to the U.S. Centers for Medicare and Medicaid Services (CMS), “In most cases, Medicare doesn’t cover dental services like routine cleanings, fillings, tooth extractions, or items like dentures.” 

The exception is when dental treatment is required as part of another medical procedure, such as if an oral exam is required before a heart valve replacement, CMS explains.  

However, some Medicare Advantage plans, also known as Medicare Part C, will include a dental plan, but Medicare Supplement plans do not.  

If your plan does not include dental coverage, it can be purchased separately. The plans vary from those that include basic dental care to coverage for major care. Most health insurance companies that offer Medicare plans, also offer dental plans.  

Entertainment and Leisure 

Retirement is a time to enjoy hobbies, travel, and social activities. Allocating a portion of your budget to entertainment and leisure can enhance your quality of life.  

Whether it’s traveling the world, pursuing new hobbies, or spending time with family and friends, planning for these activities ensures you can enjoy your retirement to the fullest.  

For a more active lifestyle, increasing your retirement budget by about 6 percent is recommended to cover these costs, according to Fidelity.  

If your budget doesn’t allow for such costs, choose activities that won’t take as much of a financial toll such as volunteering, spending time with family, taking advantage of local events, joining a book club, or gardening.  

Be mindful of balancing these discretionary expenses with your overall financial plan to avoid overspending. 

Financial Emergencies 

Financial emergencies, such as identity theft, significant investment losses, or the loss of a second income due to the passing of a spouse can also occur during retirement. These situations often require immediate financial resources and can disrupt your planned budget.  

Ensuring you have adequate insurance coverage and emergency savings in place can help mitigate the impact of these emergencies.  

It’s also wise to work with a financial advisor to develop a strategy for dealing with such contingencies. 

How to Prepare for Expenses in Retirement  

Planning for retirement is crucial to ensure a comfortable and financially secure future. With proper preparation, you can manage your expenses effectively and enjoy your golden years without financial stress. Here are some steps you can take to prepare for retirement expenses. 

Determine Your Income Sources 

Estimate your Social Security benefits. You can use the Social Security Administration’s online tools to get an accurate estimate based on your earnings record and retirement age. 

Calculate the expected income from your retirement accounts, such as 401(k)s, IRAs, and pensions. Consider factors like withdrawal rates, required minimum distributions (RMDs), and tax implications. 

Include any other potential income sources, such as rental properties, part-time work, or investments.  

Build an Emergency Fund 

Establish an emergency fund with 6-12 months’ worth of living expenses to cover unexpected costs. This fund provides a financial cushion and prevents you from dipping into retirement savings. 

Ensure the emergency fund is easily accessible, ideally in a high-yield savings account or a money market account. 

Another option if you don’t have the means to establish an emergency fund is to tap into your home equity through a reverse mortgage. A reverse mortgage loan gives borrowers several options for accessing their equity.  

One of those options is a line of credit, which works a lot like a home equity line of credit (HELOC), in which borrowers can access the funds on an as-needed basis. One benefit of the reverse mortgage credit line is that unused funds can grow.  

Improve Monthly Cash Flow 

Look for ways to improve your monthly cash flow by prioritizing paying off high-interest debt, such as credit cards and personal loans, before retiring. Reducing debt lowers your monthly expenses and increases your financial security. 

If you have a mortgage, explore options such as refinancing to lower your payments or paying off the mortgage if financially feasible. 

If you are heading into retirement with high-interest credit card debt and a mortgage, it may be worth exploring how a reverse mortgage loan, available only to homeowners 62 or older, may help. 

When you take out a reverse mortgage, the first thing it does is pay off your current traditional mortgage and the monthly mortgage payments that go with it. Of course, borrowers are still responsible for paying the property taxes, homeowners’ insurance, and HOA fees, if applicable.  

For the remaining equity, you have the option to receive your funds as a lump sum, monthly payments, a line of credit, or a combination of those methods. Choose the one that will work best for your situation.  

To learn more about how a reverse mortgage may help, check out our Complete Guide to Reverse Mortgages.  

Bottom Line 

 While it’s impossible to predict every expense that might arise during retirement, being aware of potential expected costs and preparing for them can help ensure financial confidence going into retirement.  

Establishing an emergency fund and maintaining flexibility in your budget are crucial steps in managing these surprises.  

By planning ahead and seeking professional advice, you can navigate these challenges and enjoy a more secure and stress-free retirement. 

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.   

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.  

One factor to consider is how to minimize taxes in retirement. Without employing some key strategies, taxes can quickly eat into your retirement savings.

How much of an impact can taxes have on your retirement income? Is it even something you should be worried about? Are there ways to save on taxes in retirement or at least minimize your tax burden? What are the best strategies?

These are some of the questions we will aim to answer in this article about the best retirement tax planning strategies and more.

Taxable vs. Non-Taxable Income in Retirement

Before discussing the various tax-saving strategies, it’s important to understand the taxable and non-taxable income you may receive in retirement.

Taxable Income Sources

Here are some of the most common taxable income sources you may receive in retirement:

• Pension plans. A pension plan is a retirement plan that an employer sponsors. The plan is funded by contributions from the employer, employee, or both. When an employee retires, the pension plan provides a regular income stream to the retiree. Pension plans are taxable in retirement because the contributions made by the employer and employee were not taxed when they were made. Therefore, when the retiree receives income from the pension plan, they have to pay taxes on it.
• Traditional 401(k) distributions. Traditional 401(k) distributions refer to the money you withdraw from your 401(k) retirement savings account established by your employer. When you contribute to a traditional 401(k), the money deposited is made pre-tax like a pension plan. When you withdraw the money during retirement, it is considered taxable income because you did not pay taxes on the contributions when you made them. This means that you will have to pay income taxes on the amount of money you take out of your traditional 401(k) account, which can impact the amount of money you receive in retirement.
• Traditional IRA distributions. Similar to a traditional 401(k), a Traditional IRA (Individual Retirement Account) is a type of retirement savings account allowing you to contribute pre-tax dollars. Your contributions to the account and any earnings and gains grow tax-free until you withdraw the money during retirement. However, when you withdraw money from a Traditional IRA in retirement, it is considered taxable income because you did not pay taxes on the contributions when you made them. This means that you will have to pay income taxes on the money you take out of your Traditional IRA account.
• Rental income from real estate investments. Rental income from real estate investments refers to the income received by an individual from renting out a property that they own. It can include rent payments from residential or commercial properties. This rental income is taxable because it is a form of earned income.
• Capital gains from the sale of investments. Capital gains refer to the profit made on the sale of an investment, such as stocks, bonds, or real estate. Capital gains are taxable because they are considered a form of income.
• Annuity payments. Annuities grow tax-deferred, but you will be required to pay taxes on any money you withdraw or receive from them. The amount you will pay in taxes depends on the type, fund source, and purpose of the annuity. For annuities purchased with post-tax dollars, you will only pay taxes on any earnings incurred.
• Part-time work or self-employment income. Part-time work or self-employment income is taxable because it is considered a form of earned income.
• Social Security benefits. If your income exceeds a certain threshold. Whether or not your Social Security benefits are taxable depends on your income level. Some of your Social Security income may be subject to federal income tax if your income exceeds a certain threshold. According to the Social Security Administration (SSA), taxes must be paid on Social Security benefits if an individual’s combined income is more than $25,000 per year or $32,000 for those who file a joint return.

Non-Taxable Income Sources

Non-taxable income sources in retirement can include:

• Roth IRA Distributions. Contributions to a Roth IRA are made from after-tax income. This means that when it comes time to withdraw from this account in retirement, the income will be tax-free.
• Roth 401(k) Distributions. Similar to a Roth IRA, if you contribute to a Roth 401(k) account, your retirement withdrawals will be tax-free since the contributions come from after-tax dollars.
• Life Insurance Proceeds. If you receive a death benefit payout from a life insurance policy, it is typically not taxable, according to the Internal Revenue Service (IRS). One exception is if you have an insurance product that earns interest, you will pay taxes on any earned interest. Consult your tax accountant about other possible exceptions.
• Gifts and inheritances. Any gifts or inheritances you receive from family members or friends are typically not taxable, although there may be some exceptions.
• Municipal bonds. Interest earned on certain municipal bonds is typically not taxed federally, although you may have to pay state taxes. According to Schwab, even though interest earned on municipal bonds may not be subject to federal income taxes, it may be subject to other types of taxes.
• Some Social Security benefits. As explained above, depending on your income level, some or all of your Social Security benefits may be tax-free.
• Health savings account (HSA) withdrawals. If you use funds from an HSA to pay for qualified medical expenses, the withdrawals are typically tax-free.

Tax Saving Strategies During Retirement

Choose a Roth IRA over a Traditional IRA or Do a Conversion

While a traditional IRA gives you tax savings during your working years, a Roth IRA will provide you with tax-free income in your retirement years.

“Keep your savings in a Roth IRA so you can enjoy tax-free growth and withdrawals in retirement,” said Ann Martin, Director of Operations of CreditDonkey.

If you already have a traditional IRA or 401(k), Certified Financial Planner Kenny Jung recommends converting it to a Roth IRA or Roth 401(k), also known as a Roth conversion.

“Converting a traditional IRA to a Roth IRA can be strategic, particularly in years when your income is lower,” Jung explained. “This move requires paying taxes on the converted amount at your current income tax rate, but future withdrawals from the Roth IRA would be tax-free.”

Use a Health Savings Account (HSA)

Put money in a health savings account (HSA) for your medical expenses.

“HSAs are triple-tax advantaged: contributions are tax-deductible, the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free,” Jung said.

“After age 65, funds can be used for any purpose without penalty, though non-medical withdrawals are subject to income tax,” he added.

Use Strategic Withdrawal Strategies

There are several withdrawal strategies you can use for withdrawing your retirement funds.

This is a category worth exploring to determine the strategy that will work best for your situation.

The first withdrawal strategy we will cover is considered the conventional wisdom among financial planners and retirement experts. In this strategy, you would withdraw money from your retirement accounts in the following order:

• Taxable accounts. This includes the following types of accounts: checking, savings, brokerage accounts, and employee stock plans.
• Tax-deferred accounts. This includes traditional IRAs and 401(k)s.
• No tax accounts. This includes Roth IRAs and Roth 401(k)s.

Debra Greenberg, an investment expert with Bank of America, told Merrill Lynch that it might be wise to hold off on tapping into such individual retirement accounts while allowing them to continue to grow.

“If you’re not accessing your retirement funds, they’re still growing tax-deferred,” Greenberg said.

However, there are some alternative strategies.

For example, financial planner Devin Carroll recommends factoring in the tax implications of how much money you withdraw by aiming for an average tax rate of about 12 percent throughout your retirement.

“Instead of just taking from one bucket until it’s empty and moving onto the next bucket, we’re going to solve for an average tax rate,” Carroll explained on his YouTube channel. Once you reach the 12 percent tax rate, you will supplement any additional needs by withdrawing from your Roth accounts.

To demonstrate how this would work, he uses an example of a couple with the following accounts and Social Security payments:

• IRA: $1 million
• Brokerage Account: $400,000
• Social Security for Spouse 1: $3,300 per month
• Social Security for Spouse 2: $1,650 per month

Carroll says they will pay approximately $300,000 in taxes throughout their retirement if they follow the conventional withdrawal strategy. If they follow this alternative approach, the tax burden is closer to $150,000.

It is recommended that you seek guidance from a financial advisor or tax professional to help you develop a financial plan that will work best for your individual situation.

Tap Into Your Home Equity

One way to access tax-free funds in retirement is to tap into your home equity. This might be especially beneficial if a large share of your wealth is tied up in your home.

Since money received from a home equity loan, a home equity line of credit (HELOC), and a reverse mortgage is from a loan, it is not considered income and is not taxable. One advantage to using a reverse mortgage loan is that it will pay off your current mortgage if you still have one, and it does not require monthly mortgage payments* to pay it back. This can eliminate what is typically the largest bill for most homeowners.

You also have several options for receiving the funds: a lump sum payment, monthly installments, and a line of credit.

Retirement expert Dr. Wade Pfau says that using a reverse mortgage earlier in retirement may be advantageous rather than waiting until you’re in a desperate situation.

“First, coordinating retirement spending from a reverse mortgage reduces strain on the investment portfolio, which helps manage the risk of selling assets at a loss after market downturns. Reverse mortgages can help sidestep this risk by providing an alternative source of retirement spending [sic.] (loan proceeds) after market declines, creating more opportunity for the portfolio to recover,” Pfau explains.

“The second potential benefit of opening the reverse mortgage early—especially when interest rates are low—is that the principal limit (the overall eligible amount consisting of any loan balance and remaining line of credit) that you can borrow from will continue to grow throughout retirement,” he adds.

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.

Retirement Tax Planning FAQs

At what age do you stop paying taxes on retirement income?

There is no specific age at which individuals stop paying taxes on retirement income altogether. Tax obligations on retirement income depend on the sources of that income and the tax laws in effect at any given time rather than the taxpayer’s age.

How can I reduce my taxable income while supporting charitable efforts?

One way to reduce your taxable income in retirement is to support charitable efforts. One effective method is to make charitable donations directly from your IRA through a Qualified Charitable Distribution (QCD).

The IRS allows you to make a qualified distribution to a charity by transferring up to $100,000 annually for individuals or $200,000 for couples directly to a qualified charity from your IRA, bypassing your taxable income and thus lowering your overall tax liability. This approach is particularly attractive because it can also count towards your Required Minimum Distributions (RMDs) once you reach the age where RMDs are mandatory.

What is the Required Minimum Distribution, and How Does it Affect Your Taxes?

The Required Minimum Distribution (RMD) is a mandatory annual withdrawal that individuals must start taking from their retirement accounts, including traditional IRAs, 401(k)s, and other tax-deferred retirement plans, typically starting at age 73 (as per current IRS rules). The RMD age increased from 72 to 73 in 2023 as dictated by the SECURE Act passed in 2022.

RMDs are significant for tax planning because the withdrawn amounts are taxable as ordinary income in the year they are taken. This can increase your annual taxable income and push you into a higher tax bracket, affecting your overall tax liability.

Failing to take an RMD incurs a steep penalty, amounting to 50 percent of the amount required to be withdrawn. Retirees must manage these distributions carefully to optimize their tax situation.

Note that there is no RMD for a Roth account, until the death of the account owner, according to the IRS.

What are some tax-saving moves to make before I am required to take distributions?

Before you’re required to take distributions, such as Required Minimum Distributions (RMDs), from retirement accounts, several tax-saving strategies may be advantageous.

Consider converting at least part of your traditional IRA or 401(k) to a Roth IRA account, where distributions are tax-free. However, the conversion itself is taxable in the year it occurs. This move can be particularly strategic in years when your income is lower, potentially reducing the tax impact.

Additionally, investing in HSAs, if eligible, offers triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses, which can be a valuable tool in retirement.

Does it make a difference what state you live in?

If moving is an option, look for a state that won’t add an additional tax burden to your federal income taxes. Here are the 13 states that won’t tax your retirement income because they don’t have income taxes:

• Alaska
• Florida
• Illinois
• Iowa
• Mississippi
• Nevada
• Pennsylvania
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Learn more about states that won’t tax retirement income here.

Bottom Line

Making a decision about the best way to minimize taxes in retirement will depend on the types of retirement accounts and assets that you have. The good news is that there are several strategies that you can employ.

To determine what makes sense for your individual situation, it is recommended that you consult your financial advisor or tax accountant.

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

Sources:

https://www.annuity.org/annuities/taxation https://faq.ssa.gov/en-us/Topic/article/KA-02471

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds

https://www.ml.com/articles/taxes-in-retirement.html https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity

Even if you have a decent nest egg, your income may not be what it was during your working years.
But the good news is that your expenses won’t be what they were either.  

The transition into retirement often prompts a reassessment of needs, from transportation to housing and more.  

Here are some expenses you may be able to cut or at least significantly reduce in retirement. 

Commuting Costs 

One of the first expenses that retirees can cut from their budgets is the cost of commuting to and from work.  

“After retirement, daily commuting expenses are drastically reduced, as you no longer need to travel to work,” said Jonathan Feniak, General Counsel at LLC Attorney. 

The cost of commuting is often a significant yet often overlooked portion of a worker’s budget. These costs encompass not just the obvious expenses like fuel or public transportation fares but also extend to wear and tear on personal vehicles, periodic maintenance, toll fees, and even the occasional parking charges for those driving to work. 

According to a study by Clever Real Estate, commuters in the United States spend an average of $8,466 on their commute each year, which comes out to about 19 percent of their annual salary.  

For public transit users, the expense might include monthly passes or daily fares, which can add up significantly over time.  

Upon retirement, these expenses can largely disappear from one’s budget, presenting an opportunity for reallocating funds towards other interests or savings. 

Work-Related Costs 

Commuting costs aren’t the only expenses that end when you stop working.  

“There are also plenty of expenses we face when working we don’t really notice, like extra clothing costs for work attire, makeup, lunches out, coffee runs, pet care, and even rent or mortgage costs if your work keeps you close to an expensive area,” said David Ciccarelli, the CEO & Founder of the vacation rental platform Lake and a graduate of Harvard Business School. 

Professional attire and grooming, for instance, can take a considerable slice of the budget. Suits, dress shoes, accessories, and the costs associated with maintaining such a wardrobe (dry cleaning, alterations, etc.) can add up. 

As retirees transition from their working lives, the cessation of these work-related expenses presents an opportunity not just for financial savings but for a reevaluation of lifestyle choices and priorities.  

The funds previously allocated to professional necessities can now be redirected towards fulfilling personal aspirations, contributing to a richer, more satisfying phase of life. 

An Additional Car 

For many working couples, maintaining two vehicles was a necessity, accommodating differing work schedules, work locations, and other commitments.  

However, as the daily grind gives way to a more relaxed retirement lifestyle, the need for multiple vehicles can diminish significantly, presenting an opportunity for substantial financial savings and lifestyle simplification. 

The costs associated with keeping an additional car go beyond the initial purchase price or monthly payments. To keep a car, you also must pay for insurance premiums, registration fees, regular maintenance, repairs, and fuel. 

According to MoneyGeek.com, Americans spend an average of $10,728 on their cars each year, which comes out to almost $900 per month. 

In retirement, when income typically shifts from salaries to fixed retirement savings and pensions, reducing unnecessary expenses becomes even more crucial. 

This choice will depend on individual needs and preferences. If you are unsure if this is a move you want to make, give it a test run for a week or two before making a permanent decision.  

Mortgage Payments 

As individuals transition into retirement, the question of housing takes on new significance. 

For many, the dream is to enter retirement with a paid-off mortgage, getting rid of what is typically one of the largest monthly expenses.  

“If you’ve managed to pay off your mortgage by the time you retire, this can be one of the most substantial reductions in your monthly financial obligations,” says Dennis Shirshikov, head of growth at GoSummer.com and former Professor of Economics at City University of New York.  

But what if you’re going into retirement with a mortgage? What options do you have? 

Here are some options for reducing or cutting this expense from your monthly budget: 

Downsizing 

For many retirees, downsizing to a smaller home can offer numerous benefits and savings. A smaller space often means lower utility costs, less maintenance, and potentially lower property taxes.  

“Moving to a smaller house or a less expensive area can reduce costs related to mortgage, property taxes, and maintenance,” says Feniak. 

For those with equity in a larger family home, selling and moving to a smaller property can free up significant capital to bolster retirement savings or fund other retirement activities. 

Relocating 

Retirement also offers the freedom to relocate without the constraints of job locations or school districts.  

Some retirees may choose to move to areas with a lower cost of living to stretch their retirement savings further. 

Aging in Place 

Many prefer to stay in their current home in the community they know and love.  

If you want to stay in your current home but you still have a mortgage, one option to consider is a reverse mortgage loan.  

A reverse mortgage pays off and replaces your current mortgage, and it does not require monthly mortgage payments to pay it back if you live in the home full-time and meet certain criteria.  

A reverse mortgage also allows borrowers to receive additional funds as a lump sum, monthly installments, or a line of credit.  

A reverse mortgage can also be used to purchase a new home for those who want to downsize or relocate.  

Choosing the right housing in retirement is about finding the right balance between comfort, convenience, and cost.  

Life Insurance Premiums 

Another expense you may be able to cut is life insurance.  

Life insurance is primarily designed to provide financial protection for dependents in the event of the policyholder’s untimely death and may not serve the same purpose for retirees as it did during their working years. 

Many retirees may find that the financial obligations life insurance was initially intended to cover no longer apply. 

“If the primary purpose of your life insurance was to replace income or pay off debts that are no longer concerns, maintaining those policies might not be necessary,” explains economist Dennis Shirshikov. 

The decision to cut life insurance will depend on a variety of factors.  

First, if retirement savings are sufficient to support a surviving spouse or other dependents, the need for life insurance might be significantly reduced or even eliminated. 

Second, the type of life insurance policy you have can also influence the decision to keep it or let it go in retirement. For example, if you have a term life insurance policy that provides coverage for a specified period, it may simply expire if it is still in effect as you approach retirement.  

However, if you have a whole life insurance policy or another type of permanent life insurance, it can accumulate cash value over time, presenting retirees with options like cashing out the policy, converting it to an annuity for steady income, or maintaining it for the death benefit. 

Third, you will want to consider the cost. Life insurance premiums can be notably high as one ages, making it potentially cost prohibitive for those on a fixed income. 

Child-Related Expenses 

For many individuals, the years leading up to retirement involve juggling work with the considerable financial demands of raising children, including childcare, which can be one of the most substantial household expenses. 

As retirees enter this new chapter, the direct costs associated with raising children — such as daycare fees, after-school programs, sports, and other extracurricular activities — typically fade away.  

As children age, this typically also means driver training, vehicles, car insurance, college, and more. 

These expenses can range widely depending on location and the number of children, but they invariably contribute to a significant portion of a family’s budget.  

Eliminating these costs in retirement can free up substantial financial resources, providing more flexibility in budgeting for other priorities. 

Lower Taxes 

The transition into retirement often brings about a notable shift in tax obligations, with many retirees finding themselves in a lower tax bracket than they were in their working years.  

This reduction in taxable income stems from moving from salary-based earnings to income sources like Social Security benefits, pensions, withdrawals from retirement accounts, and potential investment income.  

Understanding how these changes affect tax liabilities and employing strategies to minimize taxes can significantly enhance financial security in retirement. 

Strategically planning withdrawals from retirement accounts can help manage tax liabilities.  

For example, knowing when to tap into taxable and tax-deferred accounts can significantly affect tax outcomes. Roth IRA withdrawals, for instance, are tax-free in retirement because the contributions are made from after-tax income, while withdrawals from traditional IRAs and 401(k)s are taxed at current income tax rates. 

If you are looking to relocate, it’s also worth looking for a state that doesn’t tax retirement income or Social Security benefits.  

“A retired homeowner can also facilitate the senior freeze tax, which lets senior Americans postpone their property taxes until death,” according to Ethan Keller, president of Dominion. “Texas allows this special tax break, and retirees of 65 and older with a limited income can take this advantage for their primary residence.” 

Training and Educational Expenses 

Several jobs and careers require continuing educational training for professionals to keep their licenses in that field and stay up to date on industry advancements. This includes doctors, lawyers, pilots, nurses, teachers, and many in the financial sector.  

“In most cases, retirees no longer need to invest in professional development or further education,” says attorney Jonathan Feniak. 

Continuing education for professionals usually entails registration fees, travel expenses to conferences or seminars, and sometimes membership dues for professional organizations. These activities can be costly, often running into thousands of dollars annually, depending on the industry.  

In retirement, these costs are no longer required, freeing up funds for other uses or savings. 

Retirement Savings Contributions  

When you are working, one expense you likely have is saving for retirement. In retirement, the shift moves from saving to using those retirement savings. 

The typical recommendation is that individuals save 10 to 15 percent of their income.  

For example, if an individual was contributing 15 percent of a $60,000 annual salary to a retirement plan, they would be setting aside $9,000 per year. Upon retiring and stopping these contributions, that $9,000 per year stays in their pocket. 

The new priority once you hit retirement is no longer saving but carefully managing your cash flow and coming up with a withdrawal strategy that won’t cause you to deplete your retirement savings prematurely.  

A financial advisor can help you understand the best withdrawal strategy to make sure that your retirement savings last. 

Travel Costs 

One of the upsides to retiring is that you will have more time to travel than you did during your working years. Because of this, you may assume you will be spending more money on travel, but this is not necessarily the case.  

“As retirees do not have a work schedule, they can travel during off-peak seasons, benefiting from lower airfares and hotel rates,” explained financial advisor Ethan Richardson. 

“A strategic travel plan can result in significant savings and a more enjoyable travel experience,” Richardson added.  

When you are working, especially if you still have children at home, that means that you are restricted to traveling during school breaks as well as other timing restrictions you may have because of your job.  

To get an idea of how much you can save in travel, GOBankingRates says you can save 40 to 60 percent if you travel to the Caribbean or Mexico from June through November. 

Want to travel to Europe? Airfare and hotels are also significantly lower in the winter than in the summer, according to GOBankingRates. 

Food and Dining Out 

When you are working, there are simply more opportunities to spend money eating out, getting cocktails with co-workers after work, or picking up the much-needed afternoon cup of coffee.   

For example, if a worker spends $10 each workday on lunch, this amounts to $50 per week or about $200 per month.  

At the end of a long workday, you may feel more tempted to pick up dinner than cook at home.  

“With more time to plan and prepare meals at home, retirees often find they spend less on dining out and convenience food,” says economist Dennis Shirshikov. 

“The shift towards home-cooked meals can lead to both healthier eating habits and savings,” he added.  

The savings from buying groceries and cooking meals at home compared to eating out can be substantial. 

Bottom Line  

Retirement presents several opportunities for cutting costs as you transition from your working life to enjoying your golden years.  

These potential cost savings should make monthly budgets significantly more manageable even if you are living on a fixed income.  

By carefully reallocating resources that were once dedicated to these now unnecessary expenses, retirees can enhance their financial stability and focus on personal enrichment and enjoyment in their later years.  

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.