Let's face it: Planning for retirement is hard. There's no way to predict with 100% accuracy how much you'll need, so it's hard to determine exactly how much to save. In fact, over 80% of Americans don't know how much they'll need to save for retirement, according to a survey from Bank of America Merrill Lynch.
And even if you do have a plan and a retirement number in mind, unexpected costs can still throw off your budget.
Unfortunately, a significant chunk of retirees have found themselves spending more than they expected during retirement, and most of those costs fall into two categories: healthcare and travel.
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Preparing for the unexpected
Among retired baby boomers, 43% said they're spending more on healthcare than they expected, and 40% are spending more than anticipated on travel, according to a recent survey from investment management firm Capital Group.
This is understandable, as healthcare and travel are among the bigger expenses retirees will face. The average 65-year-old couple can expect to spend over $275,000 on healthcare expenses alone during retirement, and that doesn't include long-term care or other costs not covered by Medicare.
While travel costs vary widely, the average retiree spends around $11,077 per year on vacations. No surprise considering that the baby boomers surveyed said they planned to take an average of about five vacations per year.
These expenses can be tough to keep up with if you don't plan for them. Most soon-to-be retirees assume their expenses will decline during retirement. That's often true: During the first two years of retirement, around 39% of U.S. households spend less than 80% of what they did before retirement, according to a study from the Employee Benefit Research Institute. But if you plan to take a few trips to Europe during the first year of retirement, you'll need to adjust your budget accordingly.
Although there's no way to predict exactly how much you'll spend on healthcare and travel during retirement, there are ways to manage these expenses.
Investing through a health savings account (HSA) is one way to manage your healthcare expenses. With an HSA, you can contribute pre-tax dollars, which lowers your taxable income. You can then let your savings grow over time and then withdraw them tax-free for qualified medical expenses (which include everything from prescriptions to eyeglasses to diagnostic tests). As a bonus, once you turn 65, you can use that money for any non-medical purpose without paying a penalty (though you'll need to pay income taxes on withdrawals that don't go toward medical expenses).
An HSA is essentially an extra retirement fund made specifically for healthcare costs, and even small contributions can help pay for major expenses. For example, if you open an HSA at age 50 and contribute $100 per month, assuming you're earning a 7% annual rate of return on your investments, you'll have about $51,041 saved by the time you turn 70.
Simply being aware of how much you'll need to pay for healthcare can help, too. Medicare doesn't cover everything, and you'll still be responsible for deductibles, copays, and coinsurance. Healthcare expenses for the average retiree over age 65 amount to around $18,424 per year, about 20% (or $3,684) of which is paid out of pocket, according to a report from the National Bureau of Economic Research. An HSA can help cover these costs, or you could build a buffer of a few thousand dollars into your annual budget as you're planning for retirement.
When it comes to travel expenses, discounts are your friend. For example, if you're an AARP member and over age 50, you can receive discounts from companies like Expedia, British Airways, and Windstar Cruises. Airlines like Southwest Airlines and United Airlines offer discounts exclusively to flyers aged 65 and older.
There are other ways to save on travel besides discounts. For example, traveling during the "shoulder season" -- or the slower times of the year -- can get you cheaper flights and hotel rooms. For example, the beginning of the school year and immediately after New Year's tend to be slower travel times in general, though it sometimes depends on the destination. If you're planning to visit Rome, for instance, early May is often the best time to enjoy mild weather and beat the summer rush.
Creating a savings account specifically for traveling expenses can help keep your spending in check. At the beginning of the year, set aside the amount you've budgeted for travel into a separate savings account, and be diligent about only pulling funds from that account when you travel. Also, using an app like Trail Wallet or Mint can make it easier to track your expenses while you travel, helping you determine where most of your money is going and where to cut back.
As a retiree, you may also be eligible for many everyday discounts for expenses like groceries, clothing, and public transportation. For example, at Kroger, seniors age 60 and up receive 10% off their purchases the first Wednesday of every month. Kohl's has a similar deal, offering 15% off to those 60 and up every Wednesday. And in Chicago, those 65 and up who are part of the Illinois Department on Aging's Benefit Access Program receive free bus and train rides in the city. By using all the discounts you can find, you'll have more money to put toward travel and other fun retirement activities.
Retirement should be your chance to relax and pursue the passions you never had time for before. But if you're not financially prepared, it will be just the opposite. Paying more than you expected for healthcare and travel expenses can eat away at your retirement savings, but with a little planning, you can save more and live the retirement you've dreamed about.
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