These 3 Common Retirement Expenses Are an Unwelcome Surprise to Too Many Seniors

Retirement changes a lot, but our budget doesn’t always change as much as we might hope. While some people see their monthly expenses decrease significantly after they leave the workforce, others don’t.

These three expenses in particular often catch seniors off guard. Take some time to review your retirement plan and make sure you’ve budgeted enough for them.

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1. Healthcare and dental expenses

Healthcare costs typically rise as a person ages. Most seniors have Medicare to help them with some of their medical expenses, but you still owe premiums, deductibles, and copays with this. Plus, there’s a lot 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 sum for medical savings. A 65-year-old couple retiring in 2022 can expect to spend around $315,000 on healthcare, according to Fidelity. And some will spend a lot more.

Health savings accounts (HSAs) are great tools to help you with medical savings. Contributions to these accounts reduce your taxable income for the year, and money you spend on medical expenses is tax-free. 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 may 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 extra $1,000 to these limits.

In addition, you should look over your health insurance options. Some people choose to add a Medicare supplement plan or a dental discount plan to their budget to help them cover some of the expenses Original Medicare doesn’t.

2. Housing

Housing is most people’s largest expense at every age, and this is true for a lot of retirees as well. If you’re renting or still have a mortgage, you’ll need to make regular monthly payments in retirement, so make sure you budget accordingly.

Even if you own your home outright, you’ll still have to pay property taxes and home insurance premiums each year. And you’ll likely have periodic expenses, like repair costs if something in your home breaks. So you still need some money set aside for housing.

If you’d like, you can try to pay off your mortgage before retirement. Or you could wait until mortgage rates are low again and refinance for a more affordable monthly payment. You could also try downsizing, too. But before you do that, make sure it’ll actually save you money. If home prices have risen in your area since you first bought your home, or if you intend to move to a more expensive area, buying a smaller home may not save you any money.

3. Taxes

Unless you keep all your retirement savings in Roth accounts, you will owe some taxes in retirement. How much depends on the amount you withdraw from your savings annually and which account(s) it comes from. And obviously, if you work in retirement, you’ll owe income taxes on your salary as well.

Stashing some money in a Roth account or doing a Roth IRA conversion can help you reduce your tax bill in retirement. Beyond that, you need to estimate which tax bracket you’ll fall into and budget for this. Then, once you’re retired, watch where you are in your tax bracket and try to avoid jumping up to the next one whenever possible.

Don’t forget about required minimum distributions (RMDs). These are mandatory retirement account withdrawals everyone must make from most retirement accounts once they turn 72. There is an exception for Roth IRAs and for workplace retirement plans if you’re still working at 72. If you don’t take these withdrawals, you face heavy penalties, so remember to account for these and the effect they’ll have on your taxes.

Retirement will likely contain some unexpected expenses, even if you plan for the three things listed above. That’s why it’s smart to build a bit of a cushion into your nest egg if you can. Otherwise, you can make a backup plan, like returning to work part time, if you notice you’re draining your savings faster than anticipated.

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