Housing, transportation, and food often take prime position in retirement planning. But while these expenses may often be predictable, some could end up costing more than expected. Here are three expenses that can wreck your retirement budget.
A person’s tax liabilities are calculated by their total income. If your cash inflow from social security, withdrawals from retirement plans, and other sources are large, your tax bill may be higher than anticipated.
You must read up on the various retirement income types and the associated taxes, so you aren’t caught off-guard. For instance, Roth IRA is tax-free; however, traditional retirement plans are taxable. Moreover, if social security isn’t your only source of income, then you’ll likely pay taxes on that income as well.
To avoid surprises, it’s essential to plan ahead. Consider saving to a Roth retirement plan and move to a state with lower or no income taxes in retirement.
2. Healthcare Costs
Medicare Part A is free for enrollees, but it only covers special hospital care. To enjoy more coverage like outpatient services, you have to enroll for Medicare Part B, which charges a monthly premium. The same goes for Medicare Part D, which covers prescriptions.
You may also be required to pay for deductibles under both Medicare parts A and B, coinsurance, and other related costs. So while it may seem your healthcare costs may be lower in retirement, that’s not often the case. In fact, the average healthy retiree may spend as much as $662,156 on healthcare expenses in retirement.
To avoid being hit with unexpected medical expenses, consider setting aside funds to a health saving account (HSA). You are eligible to save to the HSA if enrolled in a high deductible health insurance plan.
If you are ineligible to save to the HSA, consider maxing your IRA or 401(k), so the extra savings can cover your retirement healthcare costs.
3. Long-term care
There’s a 70% chance of an average 65-year-old needing long-term care during retirement. While the cost may differ based on location, needs, and duration, an average retiree may spend up to $172,000 to cover it.
To avoid financial issues later in life, consider applying for long-term care insurance in your 50s. While it may cost you more, you’ll have a policy in place in case you need long-term care in the future. Also, consider padding your IRA or 401(k) accounts to save up for long-term care expenses that may arise in the future.
Conclusively, you can have the best retirement strategy in place, but once you fail to account for unexpected expenses, then your plan may collapse right before your eyes. Now that you know the costs that are likely to arise, prepare accordingly to avoid future issues.