As you plan for retirement, it's important to account for overlooked retirement expenses in your budget. From healthcare to taxes, here's what to know.
As you head into retirement, you’re probably filled with exciting plans for the next chapter in your life—whether it’s picking up a new hobby or simply relaxing after years of being on the go.
As part of your financial planning, there’s one more thing to keep in mind: overlooked retirement expenses. Some expenses, such as gas or public transit costs, will decrease when you retire like, but other costs may increase. Here's a look at what could change once you retire.
Health costs generally go up as you get older. Once you retire, you will no longer be on your employer’s insurance plan, and you'll have to rely on paying out of pocket. Medicare may cover some of the costs, but not all of them, so you may see prescriptions and other medical costs increase as you get older.
Dental and Eye Insurance and Costs
Prior to retirement, it's a good idea to max out your dental and eye insurance coverage, including eye inspections and buying new glasses. You can also do the same with your dentist, making sure your cavities are filled, root canals are taken care of, mouth guards are purchased, and x-rays are taken. Once you’re retired, you’ll have to pay these costs out of pocket, so be prepare a fund to either cover these expenses yourself or their insurance premiums.
Adequate Life Insurance
It’s always a good idea to revisit your expenses on a yearly basis to make sure your needs are covered. This includes evaluating your life insurance expenses. As you get older, life insurance premiums increase, so it's important to get life insurance sooner rather than later. If you have pre-existing conditions, you can get medical life insurance, which doesn't need a medical exam. However, the premiums will cost a bit more than standard life insurance, so it's important to shop around for a quote and fold the costs into your budget.
Federal Income Taxes
They don’t go away once you retire. Federal taxes won’t go away and your withdrawals from your Social Security, 401(k)s and traditional IRAs are taxable, so keep that in mind and have that discussion with your financial advisor. Social Security benefits are also taxable when it meets a certain threshold. If the total income is $25,000 for an individual or $32,000 for a married couple who file jointly, you have to pay income tax.
State Income Taxes
Just like federal income taxes, state income taxes also don’t go away when you retire. Depending on where you live, some states like Kansas, Minnesota, Vermont and Rhode Island tax retirement incomes including Social Security benefits. If you're not sure about your state's rules, check your local state tax agencies, and keep in mind that tax laws change on a yearly basis, which may have an affect on your filings.
You’re probably planning on staying in your home and aging in place. That means you will have to eventually modify areas of your home to accommodate you as you age. This includes putting handrails in the bathroom, widening doorways for wheelchairs or moving a bedroom to the first floor. These costs depend on where you live but could run you from $300 to $50,000 for materials and labor. If you decide to convert areas of your home, the National Association of Builders recommends a specialist in aging in place.
No one wants a leak in their water heater or their furnace to break down on the coldest winter night, so having an emergency fund to take care of repairs to your home is key to have, even in retirement. The older the home, the more likely things are going to break down, and this includes your appliances. You may want to replace older appliances with more energy-efficient ones to help save money.
If you can no longer remain at home by yourself, you may need in-home care or have to go into long-term care, and those costs can add up quickly. Long-term case expenses can fall anywhere between $60,000 to over $150,000 annually for a semi-private room, depending on your state.
Increased Utility Bills
As you’ll be home more during the day, your utilities will go up, depending on the time of the year. While there are ways to save money on your utilities, expect an initial increase when you first retire. Ahead of your retirement, it's a good idea to keep track of your costs and consider upgrading your home to more energy-efficient appliances and technology to cut costs.
Inflation affects the costs of goods and services. The current inflation is an average of 2% so your portfolio should produce income that keeps up with inflationary costs.
You may be retired, but if you're in good health, you could live another 20-30 years thanks to advances in medical technology. According to data from the World Economic Forum, children born now will likely live up to 100 years old, so your retirement will have to cover you in case you reach a century.
Retirement opens a new chapter in your life, which can be exciting. Make sure you're prepared to live the way you want and be prepared for any overlooked expenses. With a few upgrades and thorough planning, you can make sure your retirement is set for the next few decades.