It’s common for people nearing retirement to assume that once they retire, their expenses will go down. Actually, you can expect some costs to increase while others decrease. Sharon’s proprietary Your Retirement GPS™ Retirement Income Planning Process is designed to help you avoid these mistakes upfront. What follows are 7 Retirement Expenses that are often either completely overlooked or significantly underestimated.
1. HELPING FAMILY
No matter how well you prepared with your retirement planning, there’s a good chance someone in your family may need financial help at some point in your retirement. Kids and grandkids may need to borrow money or in some cases, even move in for a while. Helping out with the repayment of student loans can have a significant impact on your retirement budget if you’re not prepared. Weddings are another high-ticket item that can come up unexpectedly. It’s best to plan out how you will handle financial assistance to family members in advance. Depending on your situation, one solution might be to allocate funds to a family savings account on a monthly basis. That way you can be better prepared for the unexpected when it comes to family.
2. HIGH- TICKET ITEMS
Pre-retirees usually do a fairly good job of estimating their monthly expenses in retirement. The problem arises when you forget to budget for large expenses you can expect to encounter during retirement. For instance, you may want or need to buy a new vehicle. Significant home repairs are another expense you should anticipate and budget for in retirement. You may find yourself having to replace a roof or an air-conditioning system. If you haven’t planned for expenses such as these, you may be tempted to withdraw money from your IRA or individual account. Resist this temptation. IRA withdrawals are taxed as ordinary income and you could find yourself in a higher tax bracket because of them. If you have to take the money from your IRA, try to spread those withdrawals out over two or three years.
Everyone knows that healthcare expenses are rising rapidly. However, most retirees are usually shocked at the amount of out-of-pocket medical expenses they’re still responsible for, even when they’re on Medicare. According to Fidelity Retiree Health Care Cost Estimate, “an average retired couple age 65 in 2018 may need approximately $280,000 saved (after tax) to cover health care expenses in retirement.”1 These out-of-pocket expenses include things like Medicare premiums, Medicare supplement premiums, and other medical expenses not covered by insurance. And, if you’re not healthy when you turn 65, that number will likely be even higher.
The cost of drugs you may need in retirement is very difficult to estimate. You can’t possibly know at the beginning of retirement what drugs you may need in the future or what they will cost. It’s always best to overestimate on healthcare expenses when creating your retirement income plan.
4. LONG-TERM CARE
Long-term care costs are usually the most underestimated costs in retirement planning. If you make this expensive mistake now, it can rapidly deplete your retirement resources later. No one ever likes to think of deteriorating health or the possibility of having to live in an assisted living facility or nursing home. However, it’s estimated that 70% of all seniors will need long-term care at some point in their life.2
The average annual cost of an assisted living facility is $45,536 and the annual cost for a private room in a nursing home will run you about $92,376. The cost of having a home health care aide averages $20.50 per hour. That means to have a home health care aide come to your home 8 hours per day, 7 days a week can cost $59,040 per year.3
You see how costs like these could erode your retirement savings very quickly. Investing in long- term care policy around 55 to 60 is usually a wise decision. The younger you are when you purchase it, the less costly it will be. There are a lot of different types of long-term care policies all with various benefits attached. Sharon can help you review your options. This is an insurance policy you’ll be glad you have in retirement.
Most people underestimate what they’ll spend on entertainment in retirement, especially during the early years. According to a 2015 study done by the Employment Benefit Research Institute in Washington DC, Americans 65-74 spent an average of $5,832 on entertainment.4 This is something that is usually underestimated by retirees, mostly because they have more time to play. As part of your retirement planning, make a list of the things you love to do, any bucket list items you would like to pursue, and the costs associated with each. Estimate how more much time you may spend doing the things you love when you no longer have to worry about work obligations. Add in your bucket list items and be sure to include both in retirement income planning.
Many retirees assume their taxes will go down in retirement. Unfortunately, this is not necessarily the case. A large part of your income in retirement will be taxable. Withdrawals you take from your IRA accounts are taxed as ordinary income. Interest, other than on municipal bonds is taxable. Dividends are taxed at a lower rate, but taxable nevertheless. Depending on your income, a large chunk of your Social Security benefits may also be taxable. When developing Your Retirement GPS™, it’s important that you and Sharon develop a tax-efficient strategy, or you may be surprised at how much of your income gets eaten up in taxes.
7. LIVING A LONG LIFE
When planning for retirement, what tends to be underestimated the most is longevity. We discussed life expectancy earlier in this e-guide but just to reiterate, according the Social Security Administration, “a man who reaches the age of 65 today is estimated to live until he is 84.3 years old. A woman turning 65 today is expected to live, on average until she is 86.6 years of age. In addition to that, 25% of all 65- year olds today will live past 90 and 10% will live beyond 95.”5
Obviously, the longer you live, the more money you’ll need in retirement. Life expectancy continues to rise practically every year in this country so be sure to discuss it with Sharon. Check the actuarial tables in your pre-retirement years and as you get closer to retirement. It’s important to know what your life expectancy is, so you know how many years your retirement income will need to support you.
Many advisors can get you up the retirement mountain but far fewer have the expertise to get you down safely and without running out of money. If you think you may be underestimating some of your retirement expenses and want a Caring Advisor with specialized training in Retirement Income Planning and holds the important financial designation Retirement Income Certified Professional (RICP), schedule a Sit- Down with Sharon. She will develop for you your personalized Your Retirement GPS™ Roadmap to help you reach your Dreamed-Of Retirement. Call her at 214-346-3446 or email her at Sharon@SKSRetire.com. Her only goal is to help you reach yours.
1 How to Pay For Rising Healthcare Costs,” Fidelity Viewpoints, accessed March 5, 2019, https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs.
2 “How Much Care Will You Need,”The Basics, U.S. Department of Health and Human Services, last modified October 10, 2017, https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html.
3 “Nursing Home Costs,” Senior Living, accessed March 5, 2019, https://www.seniorliving.org/nursing-homes/costs.
4 Neal Templin, “Where Retirees Underestimate Spending,” Wall Street Journal, November 28, 2018, https://www.wsj.com/articles/where-retirees-underestimate-spending-1543445182.
5 “Benefits Planner/Life Expectancy,” Social Security Administration, accessed March 5, 2009, https://www.ssa.gov/planners/lifeexpectancy.html.
*Sharon L. Killion is a Registered Representative offering Securities and Advisory Services through UNITED PLANNERS FINANCIAL SERVICES. Member FINRA, SIPC. SKS Retirement Solutions, Inc. and United Planners are independent companies. **Insurance products are offered through SKS Retirement Solutions, Inc.
© 2019 SKS Retirement Solutions
Securities and Advisory Services offered through UNITED PLANNERS FINANCIAL SERVICES, INC. Member FINRA, SIPC. SKS Retirement Solutions, Inc. and United Planners are independent companies. Check the background of your financial professional on FINRA's BrokerCheck.