Many retirees, however, find that these assumptions are not accurate. In fact, it’s possible that your spending will actually increase after you retire. Fortunately, you can keep your spending under control by understanding some of the unique factors faced by retirees.
It’s a common assumption among many workers, retirees and even financial professionals that spending goes down after you retire. In fact, many retirement plans are built on the assumption that retirement spending will be a fraction of your preretirement income needs.
The following is a list of some things that could drive up your spending. If you haven’t considered these costs or planned for them, now may be the time to do so.
For many new retirees, the transition from employer-sponsored health insurance to Medicare can be bumpy. This is especially true if the employer plan had robust coverage for things like prescription drugs, rehabilitation costs, dental care and more. Medicare is a valuable tool for retirees, but it doesn’t cover everything.
Fidelity found in a recent study that a 65-year-old couple would need an estimated $260,000 to cover health care costs in retirement. The study goes on to note that this is a 6 percent increase from the previous year and the highest since 2002.1 The increasing price of health care in America is a very important factor to consider when planning for retirement.
There are several solutions to help ease the strain of increasing medical costs. A popular option is to contribute to a health savings account (HSA). These accounts offer tax-deductible contributions, tax-deferred growth and tax-free withdrawals for qualified medical expenses. It also may be wise to look into supplemental Medicare insurance to help combat the increase in medical costs.
Many retirees forget that retirement income is often taxable. During your working years, your taxes were probably paid out of your check, so you may not have noticed their impact. In retirement, however, you will likely pay taxes on your Social Security benefits, pension payments, retirement account distributions and more. Those taxes could reduce your spendable income.
Be sure to estimate your tax liability when planning your retirement income and budget. If you fail to incorporate taxes, you could be in for a nasty surprise after you retire.
When you retire, you may have more money and free time than you’ve had in your entire life. This could be a dangerous combination. Many retirees fill this free time with costly activities such as shopping, dining out, travel and expensive hobbies. There’s nothing wrong with enjoying yourself in retirement, but it’s important to stay within budget.
You may want to project your retirement income and create an estimated budget. Then you can calculate how much money you have available for spending on fun, discretionary activities.
Ready to develop your retirement spending plan? Let’s talk about it. Contact us today at Thomas Financial Corporation. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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