When we think about retirement,
many of us are wired to assume that our costs will naturally drop as a result
of no longer working. But we may be overestimating the extent to which that
might happen. While it's true that some expenses, like
commuting, go down in retirement, others are, in fact, likely to climb. Here
are five in particular that tend to catch retirees off guard.
1. Healthcare
Healthcare is
probably the one expense with a higher tendency to go up rather than down in
retirement. That's partly because Medicare has its limitations, and countless
seniors are forced to pay for a wide range of services that may have been
covered during their working years. According to recent projections, the
average healthy 65-year-old couple today will spend a whopping $400,000 or more
on medical costs in retirement. Reading between the lines, if you're not
particularly healthy, you can, and should, expect to see that number climb even
higher.
2. Housing
Though housing doesn't always go
up for retirees, it can be a pricier prospect than anticipated. Even if you're
among the 70% of seniors who manage to pay off their mortgages in time for
retirement, you can't forget about the peripheral costs of homeownership, such
as property taxes and maintenance. In fact, property taxes actually have a
tendency to rise over time, even during periods where the housing market itself
underperforms. Furthermore, it costs the average homeowner 1% to 4% of his or
her home's value to keep up with maintenance each year. Since retirees tend to
own older properties, you may inevitably wind up hitting the highest end of
that range, which could throw your budget off-track.
3. Entertainment
When you're not spending 40 hours
or more at the office each week, it stands to reason that you'll need to get
creative and find ways to fill that newfound free time. And while you don't
necessarily have to spend a bundle on travel and leisure, you should by no
means count on your entertainment costs going down once you stop working. In
fact, you'd be surprised at how a few discounted museum entries and movie
tickets a week can really add up over the course of a given year. It's
estimated that 58% of workers fail to account for leisure spending in
retirement, so rather than discount the amount you'll spend, factor it into
your budget.
4. Taxes
Contrary to what many retirees
are led to believe, taxes can
constitute a significant financial burden during retirement. Not only will you
pay taxes on withdrawals from a traditional 401(k) or IRA -- withdrawals that
you're actually required to start taking upon reaching age 70
1/2 -- but you'll also pay taxes on traditional investment income, interest on
money in the bank, and, in some cases, a large chunk of your Social Security
benefits.
Now the good news is that
you do have some options for lowering your taxes down the
line, whether it's moving your savings from a traditional retirement plan to a
Roth account, or shifting some investments into municipal bonds, which always
offer federal tax-exempt interest payments. But if you don't adopt some sort of
tax-saving strategy, you may come to find that you're losing a huge portion of
your retirement income to taxes alone.
5. Long-term care
While you may not necessarily
picture yourself living out your senior years in a nursing home or specialized
facility, a staggering 70% of seniors wind up needing some type of long-term
care. And if you don't save enough to cover those costs, or get yourself a
comprehensive insurance plan, you may be in for a shock during retirement.
According to recent projections,
it costs over $82,000 a year to reside in a nursing home, and that's for a
shared room -- a private one will set you back upward of $90,000 annually.
Furthermore, the average assisted living facility charges more than $43,000 per
year. If you don't read up on these costs and come up with a game plan for
covering them should they arise, you may be in for a world of financial shock
at a time.
Underestimating your senior
living costs could be one of the greatest retirement mistakes you'll ever make.
Rather than take your chances, read up on how seniors today are spending their
money, and see how well your savings are likely to stack up. You may need to
adjust your current retirement plan to ensure that you don't run short on money
later in life.
Click
here for the original article from The Motley Fool.