RRetirement changes a lot, but our budget doesn’t always change as much as one might hope. While some people see their monthly expenses drop significantly after leaving the workforce, others don’t.
These three expenses in particular often catch seniors off guard. Take the time to review your retirement plan and make sure you have enough budget for them.
1. Medical and dental expenses
Health care costs generally increase as a person ages. Most seniors have Medicare to help with some of their medical expenses, but you still owe premiums, deductibles, and copayments with that. Plus, there are many things Original Medicare doesn’t cover, including prescription drugs, dental care, and hearing aids.
Even if you do your best to stay healthy, you still need to budget a substantial amount for medical savings. A 65-year-old couple retiring in 2022 can expect to spend about $315,000 on healthcare, according to Fidelity. And some will spend a lot more.
Health savings accounts (HSAs) are great tools to help you save on medical expenses. Contributions to these accounts reduce your taxable income for the year, and the money you spend on medical expenses is tax exempt. You can contribute up to $3,650 to an HSA in 2022 if you have an individual health insurance plan with a deductible of $1,400 or more. Families can contribute up to $7,300 if their health insurance plan has a deductible of $2,800 or more. And adults 55 and older can add an additional $1,000 to those limits.
Also, you should consider your health insurance options. Some people choose to add a Medicare supplement plan or dental discount plan to their budget to help cover some of the expenses that Original Medicare does not cover.
Housing is the biggest expense for most people at all ages, and this is also true for many retirees. If you’re a renter or still have a mortgage, you’ll need to make regular monthly payments in retirement, so be sure to budget accordingly.
Even if you own your home, you will still have to pay property taxes and home insurance premiums every year. And you’ll likely have periodic expenses, like repair costs if something breaks in your home. So you still need some money set aside for housing.
If you wish, you can try to pay off your mortgage before retirement. Or you can wait until mortgage rates get low again and refinance for a more affordable monthly payment. You can also try downsizing. But before you do that, make sure it will actually save you money. If home prices have risen in your area since you first bought your home, or you’re planning to move to a more expensive area, buying a smaller home may not make you feel better. be not saving money.
Unless you keep all of your retirement savings in Roth accounts, you will have to pay taxes in retirement. The amount depends on the amount you withdraw annually from your savings and from which account(s) it comes. And of course, if you work in retirement, you will also have to pay taxes on your salary.
Hiding money in a Roth account or doing a Roth IRA conversion can help lower your retirement tax bill. Beyond that, you need to estimate what tax bracket you will fall into and budget for it. Then, once you retire, watch where you fall in your tax bracket and try to avoid jumping to the next one whenever possible.
Don’t forget the required minimum distributions (RMDs). These are mandatory retirement account withdrawals that everyone must make from most retirement accounts once they reach age 72. There is an exception for Roth IRAs and for workplace retirement plans if you are still working at age 72. If you don’t take these withdrawals, you face hefty penalties, so be sure to take this into account and the effect it will have on your taxes.
Retirement will likely come with unforeseen expenses, even if you plan for the three things listed above. That’s why it’s a good idea to build a little cushion in your nest egg if you can. Otherwise, you can make a back-up plan, like going back to work part-time, if you notice you’re depleting your savings faster than expected.
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