3 Things You Might Forget to Account for in Your Retirement Budget

Key Points

• It's important to establish a budget ahead of retirement so you can see whether you're prepared.

• You may forget to account for certain healthcare costs.

• Taxes might catch you by surprise, and your leisure spending might increase.

• The $23,760 Social Security bonus most retirees completely overlook ›

In the years leading up to retirement, one of the most important financial exercises you can run through is creating a budget for your senior years. That way, you can see whether you're on track to be able to cover your costs.

Let's say you're five years away from retirement, and you want to make sure that between your savings and Social Security, you'll be able to cover your bills. If you estimate your annual bills in retirement at $60,000 and you expect Social Security to pay you $30,000, you know your nest egg will need to provide the rest.

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From there, it's a matter of seeing whether you've saved enough or need to push a little harder during your final stretch in the labor force.

But there are a few expenses you might forget to account for accurately when creating your retirement budget. Here are three that could slip your mind -- and throw your numbers off.

1. Out-of-pocket healthcare costs

You're probably aware that once you turn 65 and are eligible for Medicare, you'll have premiums to cover for Part B. You should also expect to pay for either Medicare Advantage or a Part D drug plan, though zero-premium plans do exist.

Something you may forget to budget properly for, though, are out-of-pocket expenses, such as copays and coinsurance. Plus, you should know that original Medicare won't pay for dental cleanings, eye exams, or hearing aids -- services you may need frequently in retirement. Make sure you account for these expenses and research Medicare costs ahead of time so there are no big surprises.

2. Taxes

It's hard to forget about taxes when you're working and they're automatically taken out of your paycheck each month. But one thing you can't afford to do is forget about taxes in retirement.

If you have a traditional individual retirement account (IRA) or 401(k) plan, your withdrawals from that account will be taxed, as will withdrawals taken from a regular brokerage account. And if you have money in certificates of deposit (CDs) or a high-yield savings account, the interest you earn will be taxable as well.

You may end up in a different tax bracket in retirement than you're in now. But do not forget to factor taxes into your equation.

Of course, if you want to minimize taxes in retirement, it may be beneficial to do a Roth conversion ahead of time. However, you'll need to weigh the benefits against the near-term tax bill that will result.

3. More spending on leisure and hobbies

When you work full-time, you may have limited time to do the things you love. The beauty of retirement is that your days are yours to enjoy as you wish. But that could lead to an uptick in spending on leisure and hobbies.

Of course, on the flipside, not working means you may have more time for other tasks you previously outsourced, such as home maintenance. That could balance out increased leisure spending to some degree. But it's still a good idea to assume that your spending in this category will go up.

The more on-point your retirement budget is, the more helpful it'll be. Don't neglect to account for these expenses when you sit down to think about what retirement will cost you. If anything, you're better off erring on the side of overestimating your future expenses to ensure that between Social Security, savings, and other income, your needs are covered.

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