Don’t Get Blindsided By These Retirement Expenses

Saving for retirement based on your current expenses could set you up for a struggle later. Here's how to budget for a happy, healthy retirement.

When you start saving for retirement, your goals are based on a percentage of your current income. But what many people don’t consider is how their expenses will change after they retire.

Your life will change in ways you might not expect after retirement. Your needs will change–and so will your budget. Will you be prepared?

Rising Insurance Costs

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The biggest shock to many retirees is the cost of insurance. Not only does health insurance become more difficult to navigate once you make the switch to Medicare, but you may find that your out-of-pocket costs change, too.

Although Medicare is an important program to ensure that people 65 and older have health insurance, it might cover less than your current plan. That’s why many people decide to go with a Medicare Advantage Plan (also called Medicare Part C) to ensure adequate coverage. This is especially important if you end up needing advanced dental, vision, and hearing care as you get older, which Medicare does not cover.

Health insurance isn’t the only type of coverage that can get more expensive after retiring. Auto insurance rates tend to go up once you hit 65. If you plan to keep driving into your 80s, you’ll pay even more. That’s because seniors are a higher-risk group of drivers.

According to Insurance.com, the reasons it costs more to insure older drivers include “age-related changes in hearing or vision, slower reflexes, health conditions and medications.” To manage rising costs, you can complete a driver improvement course or look for an insurance company that offers discounts for customers with good driving records. In addition, an AARP membership can help lower your car insurance premiums by up to 15%.

Changing Healthcare Needs

As you age, your healthcare needs will evolve. Even the healthiest 65-year-old faces different health concerns than someone in their 20s or 30s. You may find that you require more maintenance medications as you get older–and with them, more frequent trips to the doctor. It may take longer to recover from illnesses and injuries, too.

Depending on your health insurance plan, you may need to pay more than you planned for prescription drugs, mobility aids, or physical therapy. That doesn’t even begin to compare to the cost of in-home care or residential care, should you need them. If you are budgeting for future healthcare based on your current spending, you’ll almost certainly fall short of your actual expenses.

Downsizing or Remodeling

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Ideally, you’ll be able to stay in your home and enjoy a comfortable retirement without needing to remodel–or move. But for many retirees, an empty nest or mobility issues can mean that their home doesn’t work for them anymore.

Downsizing to a smaller home is often a good choice–but the costs of moving can add up. Depending on where you plan to move and how much you owe on your home, you might also need to budget for more money than you expect. Moving to a senior-friendly community with one-level living and amenities that suit your new lifestyle is a wise choice, but be prepared to deal with a brand-new mortgage and HOA fees.

Even if you stay in your current home, you may need to remodel. Adding wheelchair-accessible bathroom facilities or a ground-level master suite costs money, so planning for those eventualities is an intelligent move.

Updating Transportation

Just as your home may no longer fit your lifestyle once you are retired, you may also end up needing to rethink your transportation needs. Maybe you have a minivan from the days of school runs and soccer practices. Or maybe you splurged on a sports car only to find that it’s too difficult to get into now that you have mobility issues.

Many retired couples decide to sell one or both of the vehicles they used for work commutes. Investing in a reliable car that meets your changing needs makes sense, especially if you or your partner is a wheelchair or walker user.

Don’t forget to budget for a new car when you consider your retirement years–but consider what will happen if you are no longer able to drive, too. Will you plan to call a rideshare service, or can you rely on family and friends? Costs for transportation can add up when you don’t have a vehicle and don’t have access to public transportation.

Caring for Loved Ones

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As a retiree, you may find yourself sandwiched between two generations who need your help. On the one side, you may need to arrange for the care of elderly parents. On the other, adult children may “boomerang” back to the nest just when you thought it was empty. Many people end up acting as a caretaker for a spouse, too.

It’s impossible to predict what kind of caregiving role you might need to take on, but the chances are good that you’ll need to help a loved one during your retirement years. Few people take into account those additional expenses when they plan for retirement.

Sit down with your loved ones and make a plan now. If your parents are still living, talk to them about their financial situation. Set boundaries with adult children so that they know how much help you’ll be able to provide when you transition to a fixed income. And if you’re in a long-term relationship, have a heart-to-heart about what to do if one of you ends up needing to care for the other. Hopefully, it won’t happen, but if it does, at least you’ll have a plan.

Planning for Income Tax

Speaking of planning, have you planned for income tax when you withdraw your retirement savings? Funds placed in a Roth IRA are the only savings exempt from taxes, and the IRS places a monthly cap on the amount you can contribute. Money withdrawn from traditional IRAs and 401(k) accounts is subject to income tax in the year you withdraw it.

You may also have to pay income tax on any Social Security benefits that you receive. If your total income exceeds a certain percentage threshold, then you’ll be looking at a tax bill at the end of the year. In addition, you need to pay income tax on any pensions you receive. Don’t forget that you’ll need to pay state income tax as well as federal!

Although taxes are still an inevitable part of life, even when you are retired, you can minimize your tax burden if you plan strategically. Talk to an accountant about how to maximize your retirement savings and offset taxes through measures such as deductions and investments.

Enjoying Travel

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Do you plan to travel after you retire? Many of us dream of finally seeing the world once the daily grind is done. But if you haven’t saved extra funds to travel, then you might find yourself with all the time in the world and no place to go.

The good news is that you can take advantage of many senior discounts when you plan your adventures. You’ll find discounts through organizations such as AARP and individual discounts with a wide range of vendors. You can also get a better deal by traveling during the shoulder seasons and taking mid-week flights now that you don’t have to plan your vacations around a full-time job.

Caring for Pets

If you are a pet parent, then you’ve probably already got a handle on how much food, toys, and vet bills cost each year. However, keep in mind that senior pets may need additional care as they get older–just like the rest of us.

Some retirees may choose to get a pet for companionship after leaving the workforce. Make sure to set aside an emergency fund for your pet’s vet bills, and consider buying pet insurance. While caring for a pet might not be the most expensive line item on your budget, it would be irresponsible not to ensure that you can keep your furry (or feathery or scaly) friend in comfort.

It’s also a good idea to set aside a small amount of money in a trust to care for your pets as part of your estate planning. If something happens to you, having a plan to care for your pets is essential.

Living a Long, Happy Life

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According to The Motley Fool, the average length of retirement in the United States is 18 years. Unfortunately, there’s no way to predict whether you’ll enjoy the average timespan. While a record number of Americans are making it to their centennials, the average retirement starts at 63 and ends at about 81.

But don’t focus on the statistics when you plan for your retirement. If you budget for 18 years but end up being an outlier who lives to be 95, that’s not an ideal situation. There are ways to hedge your bets, such as setting up a deferred annuity that goes into effect after a certain age.

You should plan for enough money on hand to enjoy yourself during your retirement! That might include doing the things you put off while still working, such as attending movies and concerts, joining clubs, and taking classes.

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