Hidden Costs that Could Threaten Your Retirement Nest Egg

After decades of retirement saving, most retirees hope to enter this stage of life feeling prepared with a well-funded portfolio. Yet even the most carefully constructed financial plan can face unpredictable or underestimated expenses. Taxes, inflation, and healthcare costs can creep up on retirees, forcing financial sacrifices and lifestyle adjustments. The best retirement strategies account for these expenses in advance, helping retirees protect their resources.

Tax Impact on Retirement Income

Income tax continues in retirement even if working has ceased. Social Security benefits, distributions from tax-deferred retirement accounts, pensions, investment gains, and other income may result in federal or state tax liabilities. Additionally, retirees may draw from multiple income sources. The timing and amount of those distributions can affect tax bracket and the overall tax picture. Required minimum distributions (RMDs) add another layer of complexity. RMDs begin at age 73 (eventually 75 for savers born in 1960 or later), and they are also taxed.

Here is a closer look at several retirement income sources and their potential tax treatment.

•  Social Security benefits: The Internal Revenue Service (IRS) determines the taxable portion of Social Security benefits using a calculation that includes half of an individual’s Social Security benefits plus other income, and tax-exempt interest. If this total exceeds $25,000 for a single filer or $32,000 for a married couple filing jointly, a portion of the benefit (up to 85%) may be taxable. Coordinating the timing of Social Security with withdrawals from Roth accounts, taxable savings, and other sources may help manage the tax burden.
•  Traditional IRAs and 401(k)s: Distributions from tax-deferred retirement accounts are taxed as ordinary income. The tax rate depends on a retiree’s income level and tax bracket. While many retirees fall into lower tax brackets than in their working years, more retirees are accumulating substantial savings in pre-tax accounts due to the decline of traditional pension plans. As a result, RMDs can significantly increase taxable income, potentially pushing retirees into higher tax brackets and reducing the amount of income they retain after taxes. Therefore, retirement withdrawal and income-planning strategies should carefully consider the impact of taxes.
•  Pensions and other retirement plans: The federal government generally taxes pension income from previously untaxed contributions or earnings. State tax rules vary, so place of residence can also affect pension taxes.

Tax planning is one of the five tenets of a comprehensive retirement strategy. It helps reduce current and future tax liabilities, enhancing long-term financial well-being. Qualified Roth IRA distributions, for example, can provide tax-free retirement income for holders aged 59 ½ and older. For individuals seeking ways to minimize their tax burden, a financial advisor can work with a tax professional to coordinate withdrawals, identify opportunities, and develop custom strategies appropriate to their situation.

The Eroding Power of Inflation

Inflation gradually reduces what money can buy. Even modest annual increases can significantly raise living expenses over a 20- to 30-year retirement. For instance, an average inflation rate of 3% on $50,000 in expenses today could push those costs to $100,000 in roughly 24 years.  

Annual cost-of-living adjustments (COLAs) provide some protection for Social Security benefits. COLAs correlate with changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In 2026, benefits increased 2.8%. However, these increases may fall short of real-world expenses, especially with health care, where prices rise faster than general inflation due to medical advancements, labor costs, and an aging population.

Retirees, whose medical costs can consume a larger share of household spending, can experience these increases more acutely than younger groups. Therefore, savings and investments should keep pace with inflation for long-term financial security. Maintaining an appropriate mix of investments with growth potential can help retirees achieve this while balancing income needs with risk tolerance.

More About Health Care

Health care is among the largest retirement expenses, but it is frequently underestimated. A 65-year-old retiring in 2026 could spend $185,500 on medical care in retirement, up 7.5% from 2025, according to Fidelity’s Retiree Health Care Cost Estimate. That means a married couple could face $371,000 in medical costs, excluding long-term care.

Most people expect to have healthcare costs in retirement. However, they may not understand the complexities of Medicare, the healthcare coverage most retirees receive. Medicare can cover many healthcare expenses, but retirees still pay premiums, deductibles, copayments, coinsurance, prescription costs, and costs for certain services. Most retirees need supplemental coverage through other Medicare options or private insurance, and there are still out-of-pocket costs. This brief overview of Medicare programs explains the coverage of each segment to help individuals anticipate what they might need when they retire or when they enroll at 65.

•  Medicare Part A (Hospital Insurance): Part A covers inpatient hospital care (minus copays and deductibles), hospice care, certain home healthcare services, and qualifying skilled nursing facility care. Skilled nursing coverage may last up to 100 days per benefit period, with cost-sharing requirements that vary according to length of stay. Most people do not pay a monthly Part A premium if they or their spouse have earned 40 Medicare work credits (generally about 10 years of Medicare-covered employment).
• Medicare Part B (Medical Insurance): Part B includes physician services, outpatient care, checkups, X-rays, durable medical equipment, and laboratory and ambulance services. Participants pay an income-adjusted monthly premium, deductibles, and coinsurance.
•  Medicare Part C (Medicare Advantage — MA): Part C offers alternative coverage for individuals enrolled in Parts A and B through Medicare-approved private health insurance companies. It may also provide coverage for prescription drugs, vision, hearing, and dental, as well as health and wellness programs. This plan, along with Medicare Part B, has a premium.
•  Medicare Part D (Prescription Drug Coverage): Part D is a voluntary prescription drug plan for individuals enrolled in Parts A and B. Coverage is provided through private plans and includes most prescription drugs and vaccines. Enrollees pay a monthly premium, which may be income-adjusted, and may also be responsible for deductibles and other cost-sharing.

Long-Term Care Insurance

Long-term care stands apart from all other healthcare costs and coverage. Medicare and traditional health insurance provide limited coverage for extended custodial care, leaving retirees responsible for much of the cost.

According to the U.S. Department of Health and Human Services, 70% of Americans will need long-term care in their lifetime. In 2025, the national median annual cost of a private room in a nursing home is $129,575; the cost of a home health aide (non-medical caregiver) is $80,080.

Long-term care insurance, health savings accounts (HSAs), and other strategies can help prepare for these costs. Depending on circumstances, a retiree may choose to self-fund some expenses, purchase traditional or hybrid insurance, or combine sources. A financial advisor can estimate potential costs, compare options, and design a personalized plan that uses tax-advantaged tools and investment strategies to prepare for long-term care.

Without accounting for taxes, inflation, and health care, a retirement plan can become unstable. Using SHP Financial’s Retirement Road Map®, an SHP advisor can help identify and manage vulnerabilities in your retirement planning. We incorporate income, tax, investment, healthcare, and legacy planning into a coordinated financial strategy designed to help you cover essential expenses and maintain the lifestyle you worked to build. Contact us at SHP Financial today for a complimentary review of your finances.