Frequently Overlooked Retirement CostsSubmitted by The Participant Effect on October 24th, 2019
Think you know how much you’ll need to retire comfortably? You might want to think again. According to the Schroders Global Investor Study 2018, which surveyed more than 22,000 investors from 30 countries, 15% of retirees lacked sufficient income to support a comfortable retirement. Moreover, the research found that people anticipate budgeting 34% of their retirement income for basic expenses but actually require nearly 50%. This disparity is understandable given the many unexpected changes that can occur during this phase of life. With that in mind, here are some costs that are often overlooked or underestimated when planning for retirement.
Taxes. No more employer means no one is withholding income taxes from your Social Security check each month (unless you specifically request it from the Social Security Administration)— and that can lead to an unwelcome surprise at tax time. Many retirees don’t realize that their Social Security benefits are taxable as income, so it’s important to plan ahead for any retirement tax bills. And you’ll pay taxes on withdrawals in retirement from your traditional (but not Roth) IRA.
Home Maintenance. Hopefully you’ll remain robust enough to continue to maintain your home yourself during retirement, but it’s often wise to put aside a little extra in case you need to make routine repairs or hire outside help for some home maintenance tasks you’ve been handling such as lawn care, laundry and general housekeeping.
Medical Costs. While many retirees are often pleased when they’re finally Medicare eligible, they’re often surprised when they learn that some costs are not covered under the government plan. For example, many dental, vision and other expenses (e.g., hearing aids) are generally out-of-pocket expenses and can run in the thousands of dollars. Also, Medicare premiums, deductibles, copayments, coinsurance and medication costs can add up once you’re no longer on your employer-sponsored health insurance plan.
Aging-in-Place Renovations. Many retirees want to be able to remain in their homes as opposed to receiving care in an assisted living or nursing home facility. Often, however, modifications to an existing floor plan to accommodate wheelchair access or a live-in caregiver become necessary. For example, you might require a walk-in tub or shower, grab bars or an entrance ramp to your home. While needs in this area can be hard to predict, additional dollars in your emergency fund to cover such renovations constitutes smart retirement planning.
Home Care. While we all hope to maintain our independence throughout our lives, the reality is that most of us will require some additional help with activities of daily living as we age. And the cost of this assistance isn’t cheap. Purchasing long-term care insurance is one way to plan for this expense, but that can be quite costly as well. Another option is relocating to a state with more favorable Medicaid benefits. Speak with your advisor about this essential part of your retirement plan.
Family Assistance. Many retirees want to be able to help out their children, grandchildren and extended family. You may wish to contribute to a college fund, treat your grandkids to a nice vacation, or help your children with a first home purchase. Try to anticipate these wants and budget for them accordingly.
Vehicle Replacement. For many retirees, retirement can last for decades. So it’s likely that you’ll need to replace your car at least once or twice if you continue to drive. This can be a significant expense to cover if not budgeted for ahead of time.
Inflation. Again, with many retirements lasting 20-30 years, it’s important to take inflation and the degradation of your retirement dollars’ purchasing power over time into account. This can be a complex cost to calculate, and it’s another good reason to consult with a professional.
Retirement is an exciting time of transition that brings with it many changes to your budget and lifestyle. Speak with your financial advisor to help you create a realistic budget that will anticipate as many of your retirement expenses as possible. Then, when the time comes, you’ll be in a better position to sit back and enjoy the adventure.