One of the important things to get right as you’re planning for retirement is what your expenses are going to be. In today’s blog post, I’m going to share with you 5 expenses that tend to be hidden to a lot of people, and then they find them out in retirement. I don’t want you to be surprised.
Healthcare costs not covered by Medicare
The first one really surprises people a lot. It sounds trite, but stick with me, and that is healthcare costs that Medicare does not cover. According to Fidelity, they issued a report: the average American at the age of 65 is looking at over $150,000 in healthcare costs that are not covered by Medicare. And that number does not include long-term care.
So, the first one is healthcare costs not covered by Medicare. It’s $150,000 per person, so I think it’s $157,50—uh, $315,000 per married couple. That’s a lot of money, and you need to be aware of what that is.
TAXES
Okay, the next one is taxes. Fully thinking through taxes. So, I’ve been a financial advisor for over 20 years now, and one of the most important things for me as a financial advisor is preparing to help clients think through: Do they have enough money to retire? How much money do they need to retire? Is having a good feel for what their expenses are going to be. And often people will come, you know, go home and I send them with some homework, and they do the homework and they come back and they list their major expenses. But oftentimes what’s missing from that list is taxes. And for many retirees, taxes are our second, our third, our fourth largest expense. So, it’s really important.
On the subject of taxes, sometimes early in retirement you can pay very little tax. But it can be—I’m not saying it is a mistake for you; this isn’t financial advice—but it can be. It might be a mistake for you to pay very little tax in your early years, because some of those accounts, like a regular IRA and a regular 401(k), when you take money out of that, you have to pay ordinary taxable income. And by waiting to take money out, you might be skipping the two lower tax brackets, the 10% and the 12% in the US income tax system, which has seven brackets. It’s 10%, 12%, then it jumps to 22% and 24%. So, you want to do what I call filling up those lower tax brackets.
So, sometimes when it’s not paying a lot of tax, not a good idea. Well, it might not be a good idea early in retirement.
So, think through that. I can share with you if you have a Roth IRA, if you have a regular IRA and a regular bank account, you know, those are the 3 main pillars that retirees have for how they’re going to pull money out of their investments. And you have control over which bucket you take money out of, particularly before you start getting required minimum distributions. And if you’re not taking those now, that’s where the government says you have to start taking money out of a regular IRA or a regular 401(k). If you’re not paying that money now, then your required minimum distributions are likely going to start at 73.
So, plan and take advantage of those years where maybe you can get your tax rate, uh, you can take advantage—you can fill up those lower tax brackets.
HELP CHILDREN
Okay, another hidden expense, unfortunately. You know, many of us have elderly parents, and they might need financial help later in life. And so, thinking through, is that likely going to be a situation that you might have to help out with? Same thing with adult children. You know, just ’cause they’re launched, they might have a medical condition, uh, or there might be a reason that, um, you know, you’re called on to say, “Hey, Mom and Dad, if you can help me,” as an adult child, it might be helpful. You may want to do that.
So, be thinking through whether you’re likely to be a candidate. I will share with you, oftentimes, you know, with the adult children, that can solve a problem in the short term, but it can also create another issue.
So, just be careful. We want our kids to be independent, we want our kids to be confident, and that can work against us if we bail them out with major things and too often.
Home maintenance and property tax
Okay, the next one that’s a surprise is home maintenance and property tax. You know, a lot of folks in retirement want to own their own home, and it feels like, well, you know, then they’ll never be, you know, they’ll always have a place to live. But, yes, that’s true, particularly if your mortgage is paid off. But property tax can start to eat away at your budget. Home insurance, not just property tax but property insurance.
In states like California and Florida where they’ve had a lot of natural disasters, the cost of property insurance for homes is going up. So, you’ve got the taxes, you’ve got the property insurance on it, and then just the maintenance, just the upkeep on the house. So, that can be another thing that impacts your retirement expenses.
Long-term care insurance
Okay, the next thing I mentioned earlier about healthcare costs and the costs not covered by Medicare. And I gave a disclaimer and said, the $157,050 per person that’s not covered by Medicare, that does not include long-term care insurance. And by the time we’re 65, 80% of us are going to need long-term care for some period of time.
Now, the good and the bad news is most of us won’t need it for long, which, you know, for many of us, that either means we recovered and we went home, or maybe we passed on. But long-term care can be expensive as well. It tends to be in the neighborhood of $50,000 to $100,000 a year. So, that can be a major expense that a lot of people are not thinking about.
And then, in addition to that, you know, those are the not-so-good surprises. And then there’s better surprises. You know, you might find that you enjoy some of the hobbies that you’re going to try out. And maybe they’re a little bit more expensive, but, you know what, you worked hard for your money. You deserve to—that’s what the money’s there for, right? You deserve to spend some of that. And a lot of people don’t spend enough. And so, what this is, is the go-go years.
The first, maybe, 10 years of retirement can be the expensive years. These are the years where you are doing the things you weren’t able to do when you were working, and these are the things that you dreamed about in retirement. For a lot of people, that includes world travel. So, the go-go years can be expensive, but you know what, this is the chapter of our lives where we do things like that. So, I want to encourage you to invest in yourself and to reward yourself for that hard work.
One of the reasons I’m encouraging you to invest in yourself and to reward yourself for that hard work is there’s a study that was done by Blackstone, which is the world’s largest money manager. And in that study, they were shocked when they did this study, they found that the majority of the retirees that they talked to still had 80% of their retirement savings. So, their retirement savings had gone down 20% or less. The majority. So, that means a little over 50%. It doesn’t mean 90%, but for a lot of folks, and for people that are watching YouTube videos on preparing for retirement, you likely fall into the category where you’re good savers, you make good decisions, and it can feel like a good decision to save that retirement money. But in this case, you know, spending—you’re going to get a lot more joy out of spending $10,000 in your 60s than you will in your 80s. So, if you feel you’re likely to fall into that Blackstone Group where you’re going to have 80% of your retirement savings 20 years after you retire, then I want to encourage you to really think about spending that money. Take advantage of your go-go years.