Key Points
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Taxes, home repairs, and Medicare expenses could eat up more of your income than expected.
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There are ways to manage all of these expenses with less stress.
Retirement is an exciting milestone. But it’s also not something you should jump into.
It’s important to plan for retirement so you don’t subject yourself to needless financial stress once you stop working. That means assessing your savings, rebalancing your portfolio, and figuring out a strategy for claiming Social Security.
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Another part of the equation is knowing what costs to anticipate. Here are three expenses that tend to catch retirees off guard. If you plan for them, you may have an easier time dealing with them.
1. Taxes
You may be surprised at how many of your retirement income streams are taxable. In addition to withdrawals from a traditional retirement account, your Social Security benefits may be taxable, depending on your total income. If you have money in a taxable brokerage account, you could also face taxes on capital gains and dividend payments.
It’s important to sit down with a financial planner or accountant ahead of retirement so you understand what tax bill to expect. A professional might also have suggestions for lowering your retirement tax bill — for example, converting some funds to a Roth IRA or choosing tax-friendly investments, like municipal bonds.
2. Home repairs
If you’ve been in the same home most of your life, you may be entering retirement mortgage-free. But that doesn’t mean that home won’t cost you money.
As houses age, things tend to degrade or break down. You might have to replace your roof, HVAC system, or other appliances at some point, which could wreak havoc on your retirement budget.
It’s important to have money in a savings account in case expenses like these arise. Even if you have a generous investment portfolio, tapping it at the wrong time could mean locking in losses you struggle to recover from.
Remember, there’s nothing to say your furnace won’t stop working in the midst of a market downturn. But a furnace repair or replacement is also the sort of thing you can’t just put off for months until the market recovers. Having cash on hand could help you tackle situations like this with less stress.
3. Out-of-pocket Medicare costs
Even though Medicare Part A, which covers hospital care, is free for most enrollees, there are premiums to be paid for Part B, which covers outpatient care, and Part D, which covers prescription drugs (though some Part D plans offer $0 premiums). There are also copays, deductibles, and other expenses you might incur.
It’s important to understand what costs you might face under Medicare and budget for them appropriately. If you have access to a health savings account (HSA), you may want to reserve that money for retirement, when your healthcare costs may be higher.
Taxes, home repairs, and out-of-pocket Medicare expenses may be unavoidable once you retire. But if you go in prepared, they shouldn’t throw your finances for a loop.
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