One of the most difficult aspects of saving for retirement is figuring out a goal that will keep you from running out of money during your final decades. Part of figuring out how much to save depends on estimating retirement expenses.
A lesson that is often hard learned is that some expenses increase during retirement. Failing to account for these increases in spending can cause serious issues, from reducing your quality of life to causing bankruptcy. However, when you account for increased spending in certain areas, you can ensure you maintain the lifestyle you want when you retire. Read on to learn about some of the expenses that often increase during retirement.
1. Health care
During retirement, health care can become one of the biggest annual expenses. While you may account for an increase in healthcare spending when calculating your retirement costs, you may end up underestimating how much you will need.
While healthcare spending accounts for about 8 percent of annual spending before retirement, it rises to11 percent on average after reaching 85—and it could be even higher if you need long-term care. To account for the costs of health care, make sure you understand the premiums you will likely face for Medicare and any supplemental insurance while taking account of your overall health at present. If you will need extensive care down the road, you should invest in insurance in advance to help cover costs or utilize a strategic savings plan, such as an HSA account.
2. Financial planning
Often, saving as much as possible for retirement requires taking on professional help if you want to manage your wealth responsibly. While financial planning is likely relatively inexpensive before retirement, it can become quite costly later in life.
The service provided by financial planners is invaluable and will prevent you from making costly mistakes, so you will need to account for the cost of this type of service. Planners may charge a flat annual fee, which can be a few thousand dollars if not more. Others may charge hourly rates of up to $250 per hour or more. Sometimes, professionals will charge for a project, such as a single comprehensive plan. When these individuals manage investments, they usually take a certain percentage of investable assets. They may also use a combination of billing styles.
3. Travel
One of the most overlooked expenses in retirement is travel. Once people are no longer working, their first instinct is often to hit the road and explore all the places they have always wanted to. However, travel can quickly become very expensive. Even a yearly road trip to visit grandchildren can become costly over time.
Even people who do not have the travel bug earlier in life often grow restless in retirement and start wanting to explore. For that reason, even if you feel like you may not need to, you should still plan to spend at least a portion of your retirement income on travel. You don’t want to be in a situation where you feel like you are unable to travel because you cannot afford to. If you have already budgeted for it, then it is much less of an issue.
4. Shopping
When people retire, they naturally will spend much more time at home than they usually do, especially during the day. Because of this, it is not uncommon for retirees to make changes to their homes, such as updating the décor, installing new drapes and carpets, or buying new furniture sets.
Retirees may even decide to tackle larger-scale renovations in their homes, such as a new kitchen or bathroom. For others, shopping becomes a way to relieve boredom.
Regardless of the reason, people in retirement often spend much more money on shopping than they did previously. With that in mind, you may want to inflate your spending budget, especially if you already have a hunch you will want to do some remodeling or redesigning. Not everyone will be in this group, but accounting for it early on can help you achieve your goals down the line.
5. Taxes
For the most part, income declines during retirement, and people end up spending less on taxes than they did when working. Nevertheless, you may end up owing much more than you initially expected, especially if you have a lot of money in accounts that have required minimum distributions ( RMDs), such as an IRA or 401(k). These distributions kick in at age 72, so you may suddenly find yourself with a much larger tax bill.
With too much income, you may additionally get taxed on your Social Security benefits. Many people are surprised by the sudden and sharp increase in taxes that occurs at this point, but adequate planning can help avoid this problem. One way to reduce future tax liabilities is to do a series of ROTH conversions from your tax-deferred retirement accounts, such as IRAs and 401ks/403bs, over a period of years–preferably before you hit age 72, and face the strict rules and regulations of the RMDs. You can also potentially invest in a Roth Ira or ROTH 401k along the way( depending upon your income levels), and these accounts do not trigger any taxes when making withdrawals since they are funded with post-tax money.
Finally, given the nation’s exploding debt situation ( $27 trillion and rising rapidly), and rapidly aging population ( roughly 10,500 people per day turning 65, every day for the next 9-10 years), it is highly likely that tax rates will rise in the future-perhaps very significantly. Converting tax-deferred assets to the forever tax-free status that ROTH IRAs imply at today’s historically low rates may therefore be a wise move, as the current rates and tax schedule sunset on 12/31/25.