Retirement is often painted as a time of relaxation, travel, and newfound freedom – and ideally it should be. However, many retirees face an unexpected reality as their income falls short of their actual expenses. Underestimating the true cost of retirement can lead to extreme emotional stress, forcing you to make difficult choices later in life. With this in mind, let’s explore some of the most common causes of miscalculating retirement expenses and some solutions for how to better safeguard your financial future.

Common Causes

1. Rising Healthcare Costs

One of the most overlooked yet significant expenses in retirement is healthcare. As we age, medical costs invariably increase, even for those in relatively good health. Medicare doesn’t cover everything, even with good supplemental coverage, and out-of-pocket expenses for prescriptions, long-term care, and specialized treatments can quickly add up. Without a sound retirement income strategy, you may end up having to pull money from your nest egg to cover healthcare costs, putting you at risk of spending down your principal and running out of income.

2. Inflation and Cost of Living Adjustments

Some people plan their retirement based on today’s prices, not accounting much at all for inflation. And even those who do factor inflation into their plan often underestimate its long-term impact. Inflation erodes buying power, making everyday expenses like groceries, utilities, and transportation significantly more costly over time. Although Social Security includes an annual Cost of Living Adjustment (COLA) to account for inflation, studies show that historically, over time, the increase has not kept pace with the inflation rate.

3. Longevity Risk – Living Longer Than Expected

The risk of inflation is worsened by the fact that modern medicine and healthier lifestyles mean people are living longer than ever before. While a longer life is a blessing in one respect, it also means you’ll need a financial strategy designed to generate reliable income for longer a longer period than past generations – potentially up to 30 years or more. Depleting your savings and running short of income in your 80s or 90s could force you into making some very difficult decisions, such as doing without certain things or turning to your family for financial support. Even worse, without the right retirement income strategy you may spend your 60s and 70s worrying about those possibilities.

4. Taxes and Unexpected Fees

Retirement accounts like 401(k)s and IRAs come with tax implications that many retirees underestimate. Without proper retirement income planning, the need to take Required Minimum Distributions (RMDs) can potentially push you into a higher tax bracket or force you to pay more in taxes and penalties than you should have to. Additionally, things like property taxes, insurance premiums, and home maintenance costs can increase unexpectedly, further straining your finances.

5. Lifestyle Expectations vs. Reality

Retirement goals often involve travel, enjoying your favorite hobbies, and leisure activities. However, these costs can quickly exceed your initial estimates. A single dream vacation, a new hobby, or home renovations can put a big strain your income stream and cause you to dip into savings if you’re not properly prepared. This is especially a danger in the early years of retirement when you’re still young and healthy enough to fully enjoy such activities. As a result, some retirees find themselves forced to cut back on their lifestyle and revise their goals later for fear of running short of income due to underestimating costs.

Sound Solutions

✅ Maximize Your Growth Opportunities While Working

If you’re still working and investing in a 401(k) or similar plan and you’re not maximizing your contributions and employer match, start doing so right away. Although the amount you save for retirement is only one component of a successful retirement income strategy, the more you can save during your growth and accumulation years, the better.

✅ Factor in Healthcare and Long-Term Care

As noted, underestimating healthcare and medical expenses (which rise at an even faster and steeper rate than general inflation) is one of the biggest mistakes people make in retirement planning. Working with a financial advisor who specializes in retirement income is one of the surest ways of avoiding this mistake and properly preparing for the cost of healthcare throughout retirement, including the likely need for long-term care.

✅ Prepare Adequately for Inflation

When calculating your retirement income needs, factor in at least a conservative annual inflation rate of 2-3% to help ensure your money maintains its purchasing power over time and your income keeps up with inflation. Better yet, work with a financial advisor who specializes in retirement income who may be able to help you create an effective long-term inflation hedge built around strategic reinvesting.

✅ Prepare Properly for Social Security and Taxes

Although Social Security alone won’t generate enough income for you to achieve your retirement goals, your benefits can and should be a key part of your broader income strategy. That’s why it’s important to maximize your benefits while minimizing their tax impact. As noted, preparing more broadly for tax obligations in retirement is another crucial step. That means having a strategy to minimize the tax burden of your RMDs, and making sure you have a sound, well-rounded estate plan in place.

✅ Make a Strategic Shift from Growth to Income-First  

For most people, the best way to ensure you will take all these proactive steps to avoid underestimating the cost of retirement is to make a shift in your financial strategy as you approach retirement or soon after you retire. This shift involves recognizing you are no longer in the growth and accumulation stage of life but in the income generation stage, meaning your top priority is no longer growing your nest egg for the future but protecting it so it can generate reliable income to meet your needs and goals throughout retirement.

This shift doesn’t mean that you abandon growing your portfolio; it just means that you now have a strategy designed to prioritize your interest and dividend return and to grow your savings with less risk through strategic reinvestment, rather than through capital gains. And because the income-first, growth-second approach is more strategic than investing for growth-first, it includes solutions to all the common challenges we have discussed as well as many others.

Summary

Underestimating retirement expenses can have serious consequences, turning what should be an enjoyable, low-stress time of life into a financial challenge. The key to avoiding this danger is to be aware of the many common issues that cause people to underestimate their retirement costs, and to implement proactive solutions to avoid these mistakes. And for most people, the best way to ensure your strategy includes these solutions is to make the shift to an income-first, growth-second investment strategy with the help of a financial advisor who specializes in retirement income!