In “Mind the gap: Retirement income expectations vs. reality,” we shared findings from our Retirement Spending study of October 2024 about how retirement timing, Social Security and spending patterns can affect financial security. While pre-retirees often express more concern about financial risks than current retirees, those in retirement may already be experiencing these challenges, which may increase as they age. This highlights the opportunity for financial professionals to help clients start planning earlier to reduce uncertainty and manage risks before they become problematic.
 

For many retirees, housing, food and health care often emerge as the most significant spending priorities. Although discretionary spending fluctuates, these foundational costs persist, and in some cases, rise with age. Many retirement income plans account for market volatility and portfolio withdrawals, yet few fully integrate the dynamic nature of these critical expenses. 

The impact of aging on retirement spending

Our research challenges a common misconception in traditional retirement planning: That spending follows a linear path, with retirees spending money in a steady, predictable way over time. Although housing may continue to be a major expense throughout retirement, health care costs tend to rise due to increasing medical needs, long-term care considerations and inflation. Indeed, the Centers for Medicare and Medicaid Services reported in its 2023 NHE Fact Sheet that per-person personal health care spending for the 65 and older population was 2.5 times more than spending for the average working person. This underscores the importance of planning not just for predictable expenses but also for cost escalation that could erode financial security over time.

Health care: A growing expense in later years

Many Americans underestimate health care expenses, often assuming Medicare will cover most costs. According to the 2024 Employee Long-Term Care survey, fielded in late 2024 by the Employee Benefit Research Institute (EBRI), workers underestimate long-term care and health care costs in retirement, with 43% mistakenly believing Medicare will cover most long-term care expenses. A further 15% are unsure who will pay. According to Fidelity Investments’ 2025 Retiree Health Care Cost Estimate, a 65-year-old may need $172,500 in after-tax savings to cover health care expenses in retirement — a 4% increase from 2024. To help navigate these rising costs, financial professionals should help clients:

• Plan for out-of-pocket expenses like prescription drugs and home care.
  
  
• Consider using Health Savings Accounts (HSAs) where possible. Younger cohorts are driving the shift toward long-term HSA saving, with Millennials saving 38% of their balance rather than spending it, according to Q2 2025 data from Bank of America Institute.  
  
  
• Consider long-term care strategies to plan for unexpected medical expenses.

By integrating these considerations into retirement planning, clients can better prepare for the increasing financial burden of health care. 

Housing: A cost that remains significant

Many retirees assume housing costs will decline over time, but that is not always the case. Even without a mortgage, ongoing expenses like property taxes, maintenance and modifications to support aging in place can keep costs high. Additionally, transitioning to assisted living or long-term care can dramatically increase housing expenses, making proactive planning essential. 

Inflation: The long-term erosion of purchasing power

Although inflation affects all retirees, its impact may become more pronounced in later years when spending flexibility decreases. Even a modest 3% annual rate of inflation can cut purchasing power in half over a 25-year retirement, putting a strain on essential expenses like health care, housing and daily living costs. That’s why building an income strategy that accounts for inflation can help preserve long-term financial independence.

Building flexibility into retirement income plans should be an ongoing conversation with clients given that spending often evolves during retirement. Often referred to as the “retirement spending smile,” the concept suggests that retirees typically spend more in the early years of retirement and then reduce spending in the middle years before expenses rise again later in life due to health care and long-term care needs.

Financial professionals can help clients manage such uncertainty by encouraging them to explore long-term care options and consider strategies like protected lifetime income sources to help them manage uncertainty and maintain confidence and security throughout retirement.

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