You can expect to devote a significant chunk of your life to earning a living and putting money away for retirement. When you reach that benchmark, you want to be able to look forward to your senior years with the assurance that your retirement savings will be sufficient to meet all of your requirements.
When you are preparing for retirement, it is essential to make a list of the potential expenses that may eat into the resources you have accumulated. Here are 7 expenses that can deplete your savings for retirement, as well as ways to prepare for them in advance.
Healthcare
Even with Medicare, Taylor Kovar, a certified financial advisor and CEO of The Money Couple and Kovar Wealth Management, says that out-of-pocket healthcare costs can be very high. “This includes the costs for prescriptions, surgeries, and long-term care,” he said.
HealthView Services Financial says that a healthy 65-year-old couple who retires in 2021 will probably spend between $156,208 and $1 million on health care, based on where they live and how long they live.
How To Plan:
According to Kovar, it may be prudent to have a health savings account (HSA) or a similar fund for medical expenses. “Regularly reviewing your health insurance and considering supplemental insurance can also help to mitigate these costs,” he added.
Homeownership
If you buy a home, there is an additional potential source of big expenses that might eat into your savings for retirement. According to Kovar, significant home repairs such as the replacement of roofs or issues with the plumbing grow more common as houses age. According to data provided by the Bureau of Labor Statistics, senior citizens living in the United States spent an annual median of $16,880 on housing-related expenses from 2016 through 2020.
How To Plan:
Kovar suggests that homeowners save money aside in a home repair fund and carry out routine home inspections as a means of planning for and reducing the impact of these costs.
Inflation
According to Jeff Busch, partner and investment adviser representative at Lift Financial, inflation can have a substantial impact on your future savings since you’ll need to take larger withdrawals to make up for the higher cost of living. This is one of the reasons why inflation can have such an impact. According to what he responded, “this can be especially troublesome if your portfolio is made up of fixed income strategies that don’t have the ability to keep up with inflation by increasing income over time.”
How To Plan:
According to Busch, one strategy to combat the effects of inflation is to allocate a portion of one’s investment portfolio to stocks, which, historically speaking, have generated higher returns than bonds and cash. In general, he continued, keeping a diverse portfolio can be of great assistance over the course of one’s investment career.
Adult Children (and Their Children)
Many seniors find themselves providing financial support for their adult children or even their grandchildren, whether it be for the payment of college loans or cell phone costs. According to research conducted by Merrill Lynch in 2018, 79% of parents provided some form of financial assistance to their adult children, donating a combined total of $500 billion each year to support their offspring.
How To Plan:
According to Kovar, it is critical to establish limits and have open conversations about money with family members in order to make sure that this support does not disrupt retirement plans.
Taxes
In most situations, you will be required to pay taxes on the distributions made from your retirement funds after you begin drawing money out of those accounts. There is a possibility that a portion of your Social Security benefits will be subject to taxation. And because many retirees live on a fixed income, according to Busch, excessive taxes will quickly diminish the amount of money that they have left over after paying all their bills. For this reason, retirement tax preparation is extremely important for seniors.
How To Plan:
According to Busch, converting your retirement savings to tax-free accounts through the use of a Roth IRA conversion is one approach to reduce the impact of taxes on your retirement income. “This strategy converts your taxable retirement accounts into tax-free withdrawals in the future,” he explained. “If you are still in the accumulation phase of planning, then you may want to consider making your contributions to a tax-free investment such as a Roth IRA or Roth 401(k).” “If you are still in the distribution phase of planning, then you may want to consider making your contributions to a Roth IRA or Roth 401(k).” If you want your tax approach to be as effective as possible, talking to an expert about it is another option to consider.
Market Downturns
You are going to have to invest some of your money in market assets with a higher level of risk if you want to meet your goals for retirement savings. In the long run, this leads to bigger returns; nevertheless, in the short run, this can have a major impact on retirement savings, “especially if they occur shortly before or during retirement,” said Busch.
How To Plan:
Busch recommended putting away at least three years’ worth of income in an account that has minimal volatility and is capable of producing consistent outcomes in the event that you are already retired or extremely close to retiring. This provides the remaining assets in your portfolio with the opportunity to recover during periods of weak market conditions and prevents you from having to sell assets at a loss in order to generate income. In addition to helping you retain your assets in accordance with your income requirements and manage market risk, “rebalancing your portfolio as needed” is another way that you can benefit from Busch’s advice.
Longevity
Because of advancements in medical treatment and technological breakthroughs, individuals today live for a far longer period of time than they did in the past. According to the National Center for Health Statistics, the average life expectancy for a newborn born in the United States in the year 2021 is expected to be slightly more than 76 years.
Although this could mean that you get to enjoy your golden years for a longer period of time, it also implies that you will have higher overall expenses over your lifetime. It is essential to make preparations for a longer retirement than you might anticipate, as many individuals are surviving well into their 90s and even 100s, as stated by Kovar.
How To Plan:
To combat the increased cost of living longer, Kovar suggests the following measures for retirees.
- Always maintain an emergency fund.
- Review and alter your financial plans periodically to account for life changes.
- Consider long-term care insurance and other policies that can mitigate costly unforeseen expenses.
- Educate yourself continually on financial trends, particularly those pertaining to retirement.
