Most people dream of retirement long before they arrive. Perhaps you imagine hours spent on the golf course, taking a class on a subject that has always intriqued you or volunteering for your favorite cause. Of course, that’s the idealized version of retirement. And then there’s reality.

Preretirees, be forewarned.

HEALTH CARE COSTS

The cost of health care naturally comes up most often as a top retirement challenge among retirees. According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket throughout retirement until age 92, not including long-term care costs.

Those new to Medicare may find it’s more costly than they bargained for, too. While Part A of traditional Medicare, which covers hospital benefits, is free, you will pay a premium for Part B to get coverage for outpatient or doctor services and in most cases, a premium for Part D to get prescription-drug coverage.

Add in the premium for a private Medigap policy, which helps cover the portion of Medicare approved costs, and a couple can end up paying as much as $6,500 a year in Medicare premiums.

High-income beneficiaries get an extra shock – they are subject to a premium surcharge. Even if your income isn’t always high, you can land yourself in surcharge territory if you spike your income in one year with a Roth conversion, for example, or exercised stock options. The surcharge starts to kick in if your annual adjusted gross income (plus tax-exempt interest income) tops $85,000 if you are single or $170,000 if you are married filing jointly.

Keep in mind that Medicare does not cover long-term care or short-term care costs – an additional expense.

HIGHER SPENDING

You no longer need to budget for work clothes or commuting. But you may have to start paying for some things that you used to receive as perks through work, such as the employer portion of health insurance premiums, travel expenses, etc. Small business owners and professionals who retire are often surprised how many of their expenses were picked up by the company.

Many retirees plan to see the world in their first few years of retirement, but the costs of transportation, lodging and entertainment can add up quickly. Retirees’ actual travel budgets tend to be at least 10% to 20% higher than what had been budgeted.

Even if you stay put, you will have free time to fill, and activities, such as golf or fixing up the house cost money, too. The ‘common wisdom’ that retirees spend 75% of what working people do is a dangerous thing to believe. It’s a good idea to picture your retirement and then try to put a price tag on it.

SOCIAL SECURITY TAXES

Most people realize that they are paying a tax into the Social Security system during their working years, but did you know that you may also have to pay tax on your benefits once you start receiving them?

Up to 85% of Social Security benefits are taxable, and the income thresholds that trigger Social Security income taxation are low – $32,000 for a married couple, for example.

Retirees have a difficult time adjusting to the taxability of Social Securty income and the low income thresholds. Most retirees don’t see Social Security as taxable deferred income since they paid into the government fund using after-taxed dollars during their employment years. In their minds, retirement income should not be taxed twice.

You will also forfeit some benefits if you continue to work before you hit full retirement age – you give up $1 in benefits for every $2 you make over the annual earnings limit (for 2013, that limit is $15,120).

The good news is that once you pass full retirement age, your benefit will be adjusted upward to account for the forfeited benefits.

TAXES ON NEST-EGG WITHDRAWALS

Uncle Sam not only wants a piece of your Social Security benefits, but he’s ready for his slice of your pretax retirement savings. When you withdraw money from a traditonal IRA or 401(k), those “stashed away pretax dollars” have a tax bill attached to them when they are drawn out of the account.

Money you pull from tax-deferred retirement accounts is taxed at your top ordinary-income tax rate. So if you need $30,000 to buy a new car and you are in the 25% tax bracket, you will need to withdraw $40,000 from your IRA to cover the cost of the car and the $10,000 tax bill on the withdrawal.

You can leave the money in tax-deferred retirement accounts until age 70 1/2. Starting at that age, seniors are required to take minimum withdrawals from IRAs and 401(k)s. If you have a large amount of money in those accounts, a sizeable RMD (required minimum distribution) may push you into a higher tax bracket than you thought you would end up in upon retirement.

To mitigate the tax hit, it could be advantageous to tap those accounts sooner than later. Another smart strategy: start stashing money in a Roth IRA, which has no RMDs for account owners and can be tapped tax-free.

LOSS OF INCOME FOR A SURVIVING SPOUSE

Estate planning is critical to make sure your assets are passed down as you wish. But another critical componet of estate planning for couples is making sure that the surviving spouse will have enough money to live on.

One thing people don’t plan for is the reduction of income if a spouse or partner dies – without corresponding reduction in expenses.

For example, if both spouses are both receiving Social Security benefits, a significant chunk of that income stream will disappear.

The surviving spouse can switch to a survivor benefit if that is higher than their own, but the survivor benefit will not make up for the lost income of going from two benefits down to one.

This is one reason why boosting the potential survivor benefit through delayed retirement credits is a smart strategy for couples.

The higher-earning spouse can wait to take his or her benefit, which can earn up to 8% a year in delayed credits up to age 70, and at that spouse’s death, the survivor can switch to a benefit worth 100% of the deceased spouse’s benefit, including the delayed credits plus cost-of-living adjustments.

The same income reduction can happen if a spouse who receives a pension hasn’t signed up for a joint-and-survivor annuity. If the annuity is only based on his or her life expectancy, at his or her death, that income source will dry up with no payments for the surviving spouse.

Choosing the joint-and-survivor option may result in less money monthly, but it will provide income for the surviving spouse if the pensioner dies first.