Commonly Overlooked Retirement Expenses
Despite the common misconception that retirement will be less financially burdensome than employment years, even those who cautiously anticipate retirement costs to be just slightly less than pervious budgets are often caught unaware.
A recent survey conducted by Genworth illustrated that not only does retirement cost more than anticipated (so discard that notion of Current Budget – 20% = Retirement Budget), for 65 percent of retirees surveyed expenses increased.
As we age, we can expect more medical difficulties than we had during our prime. Additionally, while Medicare helps, the benefits rarely cover all expenses, leaving most retirees with some out-of-pocket expenses.
According to Fidelity Benefit Consulting, a 65-year-old couple retiring in 2014 will pay approximately $220,000 in medical expenses during retirement. This data took into account average Medicare benefits and excluded long-term care in order to determine a probable out-of-pocket expense amount (including insurance premiums, co-pays, deductibles, prescriptions).
- Healthcare Not Completely Covered by Medicare. While Medicare is beneficial for short-term difficulties, it does not provide enough protection to be a viable long-term solution for degenerative health condition treatment or lengthy healthcare aid such as in-home nursing or extended nursing facility stays.
- Late-In-Life Care. Nobody likes to talk about it, but one integral part of our humanity is our mortality. At some point, we will all die. While the specifics regarding death are uncertain, preparation is essential. Because of the unknown aspects regarding death, it is impossible to budget precisely for our final days, months and year. Some people will pass quickly, while others will require long-term care. With nursing care costing on average between $4,000 and $5,000 a month, extended stays can place financial strain on retirees and their families.
- Dental Work. As we age, certain medical deteriorations can be expected. One area that has been cited as frequently overlooked is oral health. Unlike other medical expenses, dental changes are often unpredictable, require immediate treatment and can hit your wallet hard. Consider all of the individual procedures that are involved in having a bridge or partial made; from extractions to antibiotics, molds to fittings and the numerous doctors’ visits involved prior, during and after the ordeal, dental care can become financially devastating quickly if not anticipated.
Another overlooked area of expense is the broad lifestyle changes that will inevitably happen after employment years. While retirement planning often accounts for what expenses will no longer be factors in the budgeting equation, new expenses sometimes get compacted or outright ignored.
Chris Russell from Dave Ramsey’s MyTotalMoneyMakeover.com reiterated that “52 percent of pre-retirees expect their living expenses to decrease in retirement, but 65 percent of retirees saw their costs go up.” These costs are attributed to newfound leisure time, late-in-life moves and paying for services you once did yourself at little to no cost.
- Travel And Entertainment. According to certified financial planner Debra Morrison, in just travel expenses alone, retirees end up spending “at least 10 to 20 percent higher than what had been budgeted.” Retirement is often a chance for us to explore new places, take up new hobbies and enjoy leisurely entertainment we may not have had the luxury of taking advantage of during employment years. Free time may be abundant, but what fills the time often comes with a pretty price tag.
- Relocation. Downsizing to a smaller home may seem like a financially savvy thing to do in your retirement years, but be aware of the associated costs of a large-scale move. Not only does a move cost, but relocation can lead to affordability expenses you may not have previously considered – from state income taxes to higher utilities, gas prices and grocery bills, relocation is often more complicated than it is at face-value.
- Lawn Care And Home Maintenance. While you may have been able to shovel the snow and clear the gutters and dust all the nooks and crannies regularly throughout your lifetime, home maintenance becomes dangerous and impractical as we age. What we ounce could do for free, we may have to pay for services rendered, even if we just “tip” neighbors or loved ones to help out.
Although you may have filed taxes for 30 or 40 years by the time retirement rolls around, it is beneficial to take a second look at filing taxes. Despite years of taxed experience, filing taxes in retirement can be convoluted and complicated.
David Ning from US News offers this advice: “Expect changes in the tax code and entitlement programs. It’s almost impossible to predict what will happen to taxes and entitlement programs down the line. The important point out remember is that nothing is certain, so spread out your risks by diversifying among pre-tax and post-tax retirement accounts as well as not relying too much on entitlement programs. You just never know.”
Beyond tax code changes, there are a few predictable areas that taxation will change after employment:
- Social Security Taxes. It is important to be aware that as much as 85 percent of Social Security benefits are taxable. Despite the fact that individuals have Social Security taxes taken out of their wages prior to retirement, once you are on the receiving end of Social Security, taxation is still applicable. It is important to keep in mind that Social Security benefits function similarly to taxable deferred income, not tax-exempt income.
- IRA And 401(k) Withdrawals. Additionally, retirement funds such as traditional IRAs and 401(k) accounts are taxable once withdrawals begin. It is important to be familiar with how your retirement funds function, as not all accounts are equal or follow the same taxation regulations.
Life’s Little Curve-Balls
Finally, be aware that accidents, major home or car repairs and other uncertainties will still loom on the horizon once you retire. Remember that emergency funds aren’t just for the young. While uncertainties are logically unplanned, one thing they always are is inevitable. Things will crop up. When they do, it’s best to be prepared.
Don’t Be Caught Unaware
How to combat these potential areas: be prepared, be realistic, stick to it.
Although the specifics will vary and cannot be meticulously outlined, being cognizant that there are unknowns will bring security. Budget more than you anticipate and follow that budget. Allow yourself the flexibility to enjoy retirement while not jeopardizing your financial security.
This article is part of an ongoing collaborative project between NASDAQ Contributor and Benzinga Managing Editor Joe Young and Benzinga Personal Finance Writer Rebecca Sheppard.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.