Retirement financial planning may seem daunting to many people, but retirement budgeting is important so you can spend your golden years living as comfortably as possible. After all, the average American spends about 20 years in retirement, according to the U.S. Department of Labor.
One rule of thumb is to take your annual income before retirement and assume you’ll spend 80% of that figure each year when you retire. Of course, that can vary based on your own lifestyle, financial assets, and health.
According to recent figures from GoBankingRates.com, the average cost of living in Pennsylvania is more than $59,600 per year for most people. The annual living expenses for retirees exceeded their Social Security benefits by more than $37,200 per year. It estimates that someone in Pennsylvania would need more than $930,000 in savings to retire.
Pennsylvania is the eighth most tax-friendly state for retirees in the U.S. for retirees, according to Kiplinger, because it has a flat income tax rate of 3.07%, which is less than most states that have an income tax. Pennsylvania also doesn’t tax Social Security benefits or retirement benefits for retirees, including 401(k)s, IRAs, and pensions.
It cites the average effective property tax rate in Pennsylvania as 1.26%, accounting for state and local income taxes. Some homeowners and renters age 65 and older could be eligible for property tax or rent rebates through Pennsylvania’s Property Tax and Rent Rebate Program. Pennsylvania has a statewide sales tax of 6%, although groceries and prescription drugs are exempt. Local governments can add up to 2% in their own sales taxes.
Why Retirement Budgeting Looks Different Than Pre-Retirement
There’s a lot to consider with retirement financial planning. People in their pre-retirement years tend to be earning a steady income and saving what they can for retirement. After retiring, their income will be from Social Security and whatever additional retirement plan they have, such as pensions, 401(k)s and individual retirement accounts (IRAs).
They’ll no longer have to deal with work-related costs such as commuting, clothing, and meals. On the other hand, they could have new or additional costs such as travel, entertainment, home renovations, and hobbies. Their healthcare costs in retirement are likely to increase as they age. Their retirement housing expenses could involve downsizing and the need for assisted living.
Planning for Healthcare Costs in Retirement
A report earlier this year by the Center for Retirement Research (CRR) revealed that even with Medicare coverage, retirees face considerable costs for premiums, co-pays, and uncovered services. After subtracting these costs, and not including the cost of long-term care, the typical retiree had 71% of their Social Security benefits and 88% of their total income remaining to spend on other things.
Understanding Medicare and Out-of-Pocket Expenses
The CRR report notes that even though retirees age 65 and older have Medicare, they still face considerable out-of-pocket costs. Medicare does not cover dental, vision, and hearing care. Many retirees buy supplemental coverage to fill in these gaps, which includes additional costs.
Around 55% of retirees chose group or individual Medicare Advantage plans this year, according to KFF, a figure that’s been increasing for years. Medicare Advantage is a healthcare plan that’s offered by private health insurers as an alternative to traditional Medicare. They provide the same services as Medicare Parts A, B, and D and may include services that traditional Medicare does not. Some of these Medicare alternatives may require additional premiums, higher out-of-pocket costs, and have a more restrictive provider network.
These are the costs of traditional Medicare plans for 2026, according to Medicare.gov:
Medicare Part A (Hospital Insurance)
- Premium: $0 for most people who paid Medicare taxes for 10 years or more.
- Deductible: $1,736 per benefit period, which is defined as from the time you’re admitted to a hospital or skilled nursing facility to the time you leave, for 60 days in a row. You must pay the inpatient hospital deductible for each benefit period.
- There are also co-pays after you pay your Part A deductible:
- Days 1-60: $0
• Days 61-90: $434 each day
• Days 91-150: $868 each day while using your 60 lifetime reserve days
• After day 150: You pay all costs
Medicare Part B (Medical Insurance)
- Premium: $202.90 per month or higher depending on income. You might pay a penalty if you don’t sign up for Part B when you’re eligible, which for most people is when they turn 65. The penalty is 10% for each year you could’ve signed up for Part B but didn’t, unless you qualify for a Special Enrollment Period because you or your spouse were still working and had employer-provided health insurance. You can learn more about Part B eligibility online.
- Deductible: $283 per year.
- Coinsurance: Usually 20% of the cost of each Medicare covered service after you’ve paid your deductible, with no out-of-pocket maximum.
Medicare Advantage Part C (Alternative coverage provided by health insurers)
- Premium: Varies by plan, average cost around $14 per month.
- Out-of-pocket maximum: $9,250 for in-network services and up to $13,900 for combined in-network and out-of-network PPO services.
Medicare Part D (Prescription Drugs)
This is optional coverage, provided by private health insurers. While Medicare A and B plans do not cover most outpatient prescription drugs, most Medicare Part C plans do include prescription coverage. More information is available from Medicare.gov.
- Premium: Varies by plan, average of $34.50 for stand-alone plans.
- Deductible: Maximum of $615 per year.
- Out-of-pocket costs: $2,100 maximum per year, with no out-of-pocket drug costs once you’ve reached your annual limit.
Medicare Supplement Insurance (Medigap):
Medigap is additional coverage that helps pay a portion of your Medicare costs, such as deductibles and coinsurance under Part A and Part B Medicare plans. You must be enrolled in these traditional Medicare plans to qualify for Medigap. Some Medigap policies include coverage if you travel out of the country. Your costs and coverage levels depend on your location and other factors, and you must maintain your Part A and Part B coverage. There is a six-month enrollment period, starting the month you first obtain Part A and Part B Medicare coverage. If you fail to enroll in Medigap during that period, you could be denied coverage or have to pay a higher premium. Unlike traditional Medicare, the Medigap enrollment period does not repeat every year.
You could be eligible for Medicare savings programs that help with your Part A and Part B deductibles, coinsurance, and copayments.
Preparing for Long-Term Care and Unexpected Medical Costs
The cost of nursing home and senior home care is rising faster than older adults’ incomes and the overall rate of inflation, according to a recent report by the AARP’s Public Policy Institute. It states that home care inflation has risen 7.9% per year over the past five years, nearly double the overall inflation rate and more than triple the rate of medical inflation. During that time, adult day services increased by 33% and nursing home costs by 25% while household income for those age 65 and older grew by 22%.
The median annual cost of home care is $51,480 for 30 hours of care per week, which is more than twice the average annual Social Security benefit of around $23,700, according to the AARP. The cost of long-term care ranged from around $26,000 per year for adult day services and nearly $128,000 for a private nursing home room. That compares to the median household income of those age 65 and older of around $60,000 per year.
Long-term care insurance covers the cost of nursing homes and assisted living facilities, which is not covered by Medicare. Veterans could be eligible for long-term care through the U.S. Department of Veterans Affairs (VA). Federal employees and postal workers could receive coverage through the Federal Long-Term Care Insurance Program.
The earlier you buy a long-term care policy, the lower your premiums will be and the more likely you are to obtain coverage. According to the American Association for Long-Term Care Insurance (AALCI), the average annual premium for long-term care insurance in 2026 is:
- A 55-year-old couple buying $165,000 in coverage for both of them: $5,010.
- A 65-year-old couple buying $165,000 in coverage for both of them: $7,030 with a 3% compound growth option, so benefits increase by 3% each year. The spread between the lowest and highest rates was up to 80%.
- A single woman age 60 buying $165,000 in coverage: $4,450. The spread between the lowest and highest premiums was up to 29%.
The AALCI reports that the best time to start planning for your long-term care is between the ages of 52 and 64. According to the AALCI, the percentage of applicants who are denied long-term coverage is:
- Below age 50: 11%
• Ages 50-to-59: 17%
• Ages 60-to-69: 24%
• Ages 70-to-79: 45%
Budgeting for Housing Expenses During Retirement
If you can pay off your mortgage before you retire, you’ll be in much better financial shape without having that debt hanging over your head, and if you sell your home, you won’t have to share the proceeds with a lender.
Aging in Place vs. Downsizing Your Home
Choosing whether to stay in your current home or downsize can be difficult. For many people, they like their neighborhood and their home is full of memories as well as space for their kids and grandkids to visit. Downsizing to a smaller home, such as a condo, or moving to a 55+ community is the right move for many people before or shortly after they retire. They want to be physically and mentally able to manage the move, have time to enjoy the amenities of their new community, and selling their home gives them a significant financial boost.
Planning for Property Taxes, Insurance, and Home Maintenance
When it comes to staying in your home, simple modifications such as installing handrails and replacing doorknobs with levers (which are easier to turn) are relatively easy and inexpensive; things like stair lifts, curbless showers, and wheelchair ramps can cost thousands of dollars and aren’t covered by Medicare.
On average, it takes $10,867 in maintenance to keep a home in good working condition, according to a report last year by Zillow. Of course, this depends on the age and condition of your home and its major systems such as HVAC, the roof, and appliances. In addition to regular maintenance, you’ll have things like clearing snow and ice to deal with in the winter.
You can expect your property taxes and insurance to continue rising. Of course, if you move to a 55+ community, you’ll probably have fewer maintenance issues to deal with but will have to pay homeownership association (HOA) fees. Many retirement and independent living communities include routine maintenance, such as HVAC servicing and snow clearing.
How to Budget for Travel in Retirement
A travel retirement budget really depends on your own preferences. If you plan to travel to other countries, most U.S. health insurance plans don’t cover foreign travel, including Medicare. If you intend to stay for a long period, your ability to still receive your Social Security benefits could depend on where you stay. The Social Security Administration has more information on this online. If you’re traveling within the U.S., you would still be covered by traditional Medicare plans, although your service area for Medicare Advantage and Part D plans could be limited.
Build an Emergency Fund for Unexpected Expenses
While working families are advised to have at least three to six months’ worth of their household living expenses as an emergency fund, many retirees have anywhere from six months to two years’ worth of living expenses in their emergency fund. Your own needs depend on your retirement income, as well as whether you might face expensive medical care, vehicle or home repairs. Even if you have considerable investments, an emergency fund kept in a savings account or money market account could help insulate your investments if you had to liquidate some of your portfolio during a downturn in the market.
How The First Can Help You Plan for a Secure Retirement
Schedule a conversation with The First’s Wealth Management team to review your retirement plan and explore savings and retirement planning in Bucks County, PA. Please call us at 215.968.4872 or contact a member of our team to set up a consultation.
