Most people approaching retirement focus on one big question: “Do I have enough saved?” While that million-dollar nest egg might look impressive on paper, Luke LaRock, NSSA®, Associate Wealth Advisor at Pinnacle Wealth, warns that the real challenge is understanding what that money can actually do for you after taxes, inflation, and more costs you don’t see coming.
Let’s explore some of the unseen retirement costs and how you can plan for them.
The Most Commonly Overlooked Retirement Costs
When Luke sits down with clients, he consistently sees the same blind spots. The big ones? Healthcare, taxes, inflation, and long-term care—costs that can quietly drain your retirement savings faster than you might expect.
Healthcare
Many people assume Medicare will handle all their healthcare needs, but that’s far from reality. “Original Medicare parts A and B cover hospital stays and outpatient care like doctor visits,” Luke explains, “but there are some major gaps that catch retirees off-guard.” Here’s what Medicare typically doesn’t cover:
- Prescription drugs (unless you enroll in a separate Part D plan)
- Routine dental, vision, and hearing care, like cleanings, eyeglasses, and hearing aids
- Long-term custodial care, including assistance with daily living in nursing homes, assisted living facilities, or at home
“Perhaps the most surprising [thing] is that Medicare doesn’t cover long-term custodial care,” Luke notes. “While it might cover some short-term skilled care after a hospital stay, extended care visits often fall entirely on the retiree.”
Taxes
Another major shock for new retirees? Learning that retirement income is still taxed. “People are surprised to learn that their social security benefits can be taxable, and they are for most people,” Luke says. Here are the key tax surprises to expect:
- Retirement Account withdrawals are taxed as ordinary income (aside from Roth dollars, which are tax-free)
- Up to 85% of Social Security benefits can be taxable, depending on your income
- Required Minimum Distributions (RMDs) start at age 73, whether you need the money or not
“People are surprised how quickly this income adds up and how it can push them into a higher tax bracket, affect Medicare IRMAA premiums, or trigger taxes on more of their social security,” Luke explains.
Inflation
Inflation might be the most underestimated threat to retirement security. “Even at a modest 3% rate, your cost of living doubles every 24 years,” Luke points out. “So if you retire at age 65, your grocery bill at 85 could be almost twice as high.”
This means your $60,000 annual budget today could require $120,000 in purchasing power two decades into retirement. Healthcare costs often inflate even faster than average, making this challenge even more severe.
6 Strategies to Manage These Hidden Costs
The good news? With proper planning, you can prepare for these expenses and protect your retirement security.
- Start Medicare Planning Early
Luke recommends exploring your Medicare options 6 to 12 months before turning 65.
“Consider meeting with a licensed Medicare professional to walk through your specific needs,” he advises, noting that you have a six-month Medigap open enrollment window after enrolling in Medicare Part B when you can purchase supplemental coverage without medical underwriting.
- Maximize Your HSA If You’re Still Working
Health Savings Accounts offer a “triple tax advantage”—tax-free going in, growing, and coming out if used for healthcare. “If you’re working past age 65, you can still contribute to an HSA as long as you’re not enrolled in Medicare,” Luke explains, though he cautions about potential retroactive Medicare coverage affecting HSA contributions.
- Think Tax Diversification, Not Just Savings Diversification
Having your retirement savings spread across different tax treatments—taxable, tax-deferred, and tax-free accounts—provides crucial flexibility.
“A million-dollar 401(k) is great, but it’s not the same as a million-dollar Roth account. Even though your 401(k) might show $1 million, the reality is you won’t keep the full amount. Taxes take a bite out of every withdrawal, so your true spendable balance is meaningfully less. That’s one reason tax diversification, like holding Roth or taxable accounts in addition to a 401(k), is so valuable.”
- Consider Roth Conversions During Lower-Income Years
If you retire before RMDs kick in, you may have a sweet spot for converting traditional IRA dollars to Roth, locking in lower rates now and creating tax-free income later. “But you have to be careful that you don’t convert too much and bump yourself into higher Medicare IRMAA brackets,” Luke warns.
- Use Qualified Charitable Distributions (QCDs)
If you’re over 70 and a half and charitably inclined, you can give directly from your IRA, reducing your taxable income while satisfying your RMD requirement.
- Build a Growing Income Into Your Retirement Plan
Use investments with long-term growth potential and income streams that adjust for inflation. Social Security provides built-in inflation adjustments, and some pensions do too.
“We solve for this by including growing income in the plan through investments with long-term growth potential,” Luke explains, emphasizing the importance of keeping some growth investments even in retirement to outpace inflation over a 30-year retirement.
Insurance Isn’t Always the Answer to Long-Term Care
When it comes to long-term care, Luke makes an important distinction: “I wouldn’t say that everyone needs to buy long-term care insurance, but you do need to have a long-term care plan.”
This planning involves honest conversations about who would care for you, where, and how you’d pay for it. While traditional long-term care insurance has evolved, there are now hybrid policies that combine long-term care benefits with life insurance or annuities, providing more flexibility than the old “use it or lose it” models. “You could earmark maybe a portion of your assets for those care costs.”
Understanding the “Widow’s Penalty”
One scenario many couples haven’t considered is how losing a spouse affects retirement finances. “If a survivor loses one social security benefit, often it’s going to be the smaller one,” Luke explains. “But it’s not like your living expenses are exactly cut in half.”
Fixed expenses like housing, utilities, and medical premiums don’t decrease proportionally, but the surviving spouse must now file as single, facing higher tax rates. “We can plan for this by stress testing the plan at one life assuming one spouse passes away today looking at both the income needs and what that tax impact is going to look like,” Luke advises.
How to Stress Test Your Retirement Plan
Pinnacle Wealth takes a comprehensive approach to retirement planning that goes beyond simple savings calculations. “We always model for longevity. We don’t assume clients will pass at the average life expectancy,” he explains. “We’re planning just in case you live longer than you expect and shorter than you expect.”
To manage longevity risk while maintaining growth potential, Luke employs a bucketing strategy that separates retirement assets by time horizon:
- Bucket 1 (Years 1-3): Safe, liquid investments like cash, money markets, and short-term bonds for immediate needs
- Bucket 2 (Years 3-10): Moderate risk and income-generating investments to replenish Bucket 1
- Bucket 3 (10+ years out): Long-term growth investments that may fluctuate more but aren’t needed immediately
“A good rule of thumb is to hold five years’ worth of planned withdrawals in safer investments that can act as a buffer during bear markets,” Luke recommends, noting that this approach helped clients avoid selling stocks during the 2008 financial crisis recovery period.
The firm also runs scenarios that simulate market downturns, higher inflation, unexpected healthcare costs, and long-term care needs. “That gives clients confidence that their plan is built to withstand surprises and helps us identify those gaps early,” Luke explains.
Retirement Planning as Risk Management
Whether you’re decades from retirement or already there, having honest conversations about these challenges can make the difference between simply surviving retirement and truly thriving in it. “Retirement planning is more than just investing. It’s risk management,” Luke states. “The biggest risks aren’t always market crashes. They’re the slow creeping costs.”
The best way to plan for absolutely everything is by collaborating with professionals. Once you’ve found a CPA, estate planning attorney, and Medicare specialist you can trust, everyone can work together to successfully manage your retirement.
As Luke puts it, “Planning isn’t just about building wealth. It’s about stewarding it wisely for the rest of your life, including today and tomorrow.” Are you ready to start planning for your financial future and have a team of experienced professionals by your side? The team at Pinnacle Wealth can help guide you to financial freedom and confidence.
