6 Ways to Curb Stealth Costs in Retirement

Retirement is often envisioned as a period of financial peace, free from the stress and instability of a paycheck-to-paycheck lifestyle. But even with careful planning, retirees can find themselves blindsided by stealth costs or unexpected expenses that disrupt long-term financial security.

These hidden expenses, often overlooked in retirement planning, can strain fixed incomes, which makes it necessary to understand what they are and how to manage them.

Understanding Stealth Costs in Retirement

Stealth costs are the unanticipated and underestimated expenses that quietly chip away at your retirement savings over time. Unlike predictable costs—like a mortgage or insurance premiums—stealth costs emerge unexpectedly.

Since retirees typically rely on fixed or limited income sources—like Social Security, a pension, and retirement accounts—their long-term retirement budget can be thrown off balance when these costs arise.

A recent Schroders study revealed that 45% of retirees face higher-than-expected expenses..

These are some common stealth expenses that may be overlooked:

1. Healthcare: Healthcare costs remain a major concern for 86% of retirees. Even with Medicare coverage, out-of-pocket expenses can add up quickly. Prescription medications, dental care, hearing aids, and long-term care are often only partially covered, or not covered at all.
2. Taxes: You’ll still pay taxes in retirement, as traditional 401(k) and individual retirement account (IRA) withdrawals are taxed as ordinary income. Additionally, Social Security benefits may be taxable, depending on your total income.
3. Inflation: Retirees on fixed incomes may struggle to keep pace as housing, food, and utility costs climb. Even with modest inflation, retirement savings can be significantly reduced over the years.
4. Family: Retirees may feel obligated to help children and grandchildren with various costs, including housing, education, and emergencies.
5. Home maintenance and repairs: Your mortgage may be paid off, but ongoing homeownership costs like maintenance and repairs can still put pressure on your retirement income, especially if you find yourself dealing with a natural disaster, which have become increasingly common.

6 Strategies to Manage Stealth Costs

Fortunately, there are effective strategies retirees can use to anticipate and minimize the impact of stealth costs on their finances, including:

1. Factor stealth costs into your budget: As you plan your budget, proactively account for these irregular expenses.
2. Delay retirement: Working a few extra years can boost your retirement readiness. It allows more time for savings to grow, increases Social Security benefits, and shortens the number of years those savings need to support you.
3. Utilize Health Savings Accounts (HSAs): If you have an HSA before retiring, maximize contributions. HSAs offer triple tax advantages: Contributions are tax-deductible, earnings grow tax-free, and qualified withdrawals for medical expenses are tax-free. Additionally, funds roll over from year-to-year and can be used to pay off healthcare costs in retirement.
4. Diversify income: Consider creating multiple sources of income—such as annuities or rental income—to reduce reliance on one income source.
5. Maintain an emergency fund: Have a cushion of savings in cash or cash-equivalents like money market funds. How much you keep in your retirement emergency fund should factor in lifestyle, health, monthly expenses, and income sources.
6. Review and adjust your plan annually: Your needs and costs will change over the course of your retirement. Regularly review your budget, spending, and portfolio with a financial advisor to stay ahead of things like inflation, changes in tax laws, and evolving healthcare needs.

The Bottom Line

In retirement, it’s not just how much you have, but how well you manage it that often makes the difference. Stealth costs may not be part of your initial retirement projections, but they may be inevitable. Recognizing their potential impact and preparing for them through strategic planning, and smart budgeting can help preserve retirement security.