Retirement usually brings an end to the period of increasing net worth and savings to usher in a new era of fixed-income living. Instead of adding to your savings, you're now slowly draining it. This isn't anything to be alarmed about if you saved diligently and spend within reason, but some expenses can cut deep into your budget and might threaten your financial security down the road. Here are five costs to watch for.
1. Major medical expenses
Healthcare is an obvious one and people are right to be concerned about it. It's already costly and inflation will only make things worse with time. Plus, seniors tend to require more medical care as they age. Adults 65 and older spend three times as much on healthcare on average, compared to working-age adults, according to the Centers for Medicare and Medicaid Services. Even if you consider yourself a healthy person, an injury could still land you with a hefty medical bill.
Do what you can to keep your medical costs low by prioritizing your health at every age. Most seniors switch to Medicare once they turn 65, but Medicare doesn't cover everything. Consider investing in a Medicare Advantage or Medicare supplement plan to cover the services that Original Medicare doesn't. If you have access to a health savings account (HSA) right now, start stockpiling money here that you can use to help cover your medical expenses in retirement. Individuals may contribute up to $3,550 in 2020 and families may contribute up to $7,100.
Bringing debt into retirement isn't smart if you can avoid it. It's another monthly bill you'll have to worry about and if it's high-interest debt, like credit card debt, the problem could get worse instead of better over time if you're only making the minimum payment. Falling behind on your payments will hurt your credit score and you could lose anything you put up for collateral, like your home or car.
Make debt repayment a priority now so you don't have to worry about it in retirement. Start tackling your high-interest debt first. Make the minimum payments on all of your debt and then put all your extra cash toward your debt with the highest interest rate first. When that's paid off, move onto the next one. You might have to cut back your spending to free up the cash for this. You can also use year-end bonuses or tax refunds to help speed up the debt repayment process.
You will owe taxes in retirement unless all of your retirement savings are in Roth accounts. It's possible to minimize what you owe by carefully choosing which retirement accounts you contribute money to and withdraw it from. Tax-deferred retirement accounts reduce your taxable income in the year of the contribution, but then you must pay taxes on your withdrawals in retirement. These accounts are best if you believe you're in a higher tax bracket today than you will be in once you retire.
With Roth accounts, you must pay taxes on your initial Roth contributions, but after this, that money grows tax-free. These accounts can save you more than tax-deferred accounts on taxes if you believe you're in the same or a lower tax bracket today than you believe you'll be in once you retire. Having some of each type of savings is also an option, but you should favor whichever one you feel will give you the bigger tax break.
Once you're in retirement, stay mindful of the tax brackets and use this to help you decide how much to withdraw from each type of savings. If you withdraw most of your money from tax-deferred savings and you're approaching the top of your tax bracket, consider using Roth savings, if you have any, for the rest of the year to avoid getting bumped up into the next tax bracket and owing the government more.
4. 401(k) fees
All retirement accounts charge fees. There isn't a way around that. But you can reduce how much you're paying in fees by choosing your investments carefully. Index funds are a great option for those who want to keep their portfolios diverse and their costs low. They're mutual funds -- bundles of stocks and bonds -- that track a market index, like the S&P 500. The assets in these funds don't change as often as traditional mutual funds, so there's less work for fund managers to do and they can pass these savings onto you in the form of lower expense ratios -- the annual fees all mutual funds charge shareholders.
Try to avoid paying more than 1% of your assets in fees every year if you can. Check with your plan administrator or read the prospectus for your investments if you're unsure how much you're paying. Talk to your employer about offering more affordable investment options if it doesn't currently have any and consider moving your savings to a more affordable IRA if your company refuses. The only time to stick with a company charging high fees is if you're also getting a 401(k) match that covers at least what you're paying in annual fees.
Some retirees still have living parents and if those parents run out of retirement savings, they often fall back on their children for support. If this happens to you, your retirement dollars will have to stretch even further. To make matters worse, some families also end up with adult children back in the house.
You can't control how your parents or your children manage their money, but you do have some say in how much financial support you give them. Require adult children to pay rent and contribute to the household in other ways to reduce the burden on you. Try to help aging parents apply for any government support programs they might qualify for to reduce how much financial support you must provide them and ask siblings to contribute to their support too, if you have any.
Anticipating these retirement expenses and planning for them can prevent you from losing money you could have held onto. You might not be able to avoid all of these costs, but they don't have to ruin your retirement budget.
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