You’ve spent a good part of your life working and saving to cover your retirement fund. Once you reach this milestone, you want to feel confident that your nest egg filled with 401(k) contributions, traditional IRA lump sum distributions, and Social Security benefits is large enough to see you through your golden years.
As you approach retirement age, it’s important to review your investment strategy and anticipate some of the costs that could affect your savings. Here are seven expenses that can drain your retirement savings and how to plan for them.
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Even with Medicare, out-of-pocket healthcare expenses can be significant. According to Taylor Kovar, certified financial planner and CEO of The Money Couple and Kovar Wealth Management, “This includes prescriptions, surgeries and long-term care costs.”
Many financial experts estimate that you’ll need at least $1 million in savings to retire comfortably, and with seniors paying hundreds of thousands of dollars in medical bills, this shortens how long even exorbitant funds will last.
How to plan: Kovar said it’s a good idea to have a health savings account (HSA) or similar fund specifically for medical expenses. “Reviewing your health insurance regularly and considering supplemental insurance can also help mitigate these costs,” he added.
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If you own a home, this can be another source of major expenses that eat into retirement funds. “As homes age, significant repairs such as roof replacement or plumbing issues become more common,” Kovar said. This is especially true if you have lived in your home for many years, as this tends to result in expensive repairs and maintenance for older features.
How to plan: Kovar recommends setting aside a home maintenance fund and conducting regular home inspections to help anticipate and spread these costs.
Inflation can have a significant impact on your future savings because you’ll need to take larger withdrawals to compensate for the higher cost of living. According to Jeff Busch, partner and investment advisor representative at Lift Financial, “This can be particularly troublesome if your portfolio consists of fixed income strategies that cannot keep up with inflation by increasing income over time.”
How to plan: To mitigate inflation, Busch said you may want to invest some of your portfolio in stocks that have historically provided better returns than bonds and cash. Overall, he added, maintaining a diversified portfolio can be very helpful in the long run.
From student loans to cell phone bills, many retirees find themselves financially helping their grown children or even grandchildren. Unfortunately, this is the opposite of creating generational wealth and can lead not only to depleting your retirement accounts, but also to debt in your fixed income years.
How to plan: Kovar said it’s critical to set boundaries and have open financial discussions with family to ensure that support doesn’t derail retirement plans.
Once you start taking money out of retirement accounts, you pay out of that taxable income and distributions (in most cases). You may also have to pay taxes on some of your Social Security benefits. With many retirees living on a fixed income, Busch said higher taxes immediately reduce take-home income. That’s why tax planning is key for retirees.
How to plan: Busch said one way to help offset taxes in retirement is to convert your retirement accounts to tax-free accounts using a Roth IRA conversion. “This strategy turns your taxable retirement accounts into tax-free withdrawals in the future,” he explained. “If you are still in the accumulation phase of planning, then we recommend that you consider making retirement savings contributions to a tax-free investment such as a Roth IRA or Roth 401(k).” It may also be a good idea to talk to a professional to optimize your tax strategy.
At age 65, your retirement savings goals go into full action mode, so it may be a good idea to put some of your money into riskier market securities. While this results in higher returns, short-term market declines have a significant impact on your retirement savings, “especially if they occur shortly before or during retirement,” Busch said.
How to plan: If you’re in or very close to retirement, Busch suggested setting aside at least three years of income in a low-volatility account that can produce stable results. This gives the remaining assets in the portfolio time to recover in falling markets and prevents you from liquidating losing assets to provide income. “Rebalancing your portfolio as needed will also help you keep your assets in line with your income needs as well as manage market risk.”
For better or for worse, people are living much longer these days than before, thanks to advances in health and technology. While this might mean you’ll spend more time enjoying your golden years, it also means you’ll have higher overheads throughout your life. “With many people living into their 90s or even 100s, it’s critical to plan for a longer retirement than you might expect,” Kovar said.
How to plan: To combat the rising cost of living due to longevity, Kovar recommends that retirees do the following:
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Always have a rainy day fund.
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Periodically review and adjust financial plans to account for changes in life.
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Consider long-term care insurance and other policies that can offset significant unexpected costs.
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Continually educate yourself about financial trends, especially those related to retirement.
Caitlyn Moorhead contributed to the reporting of this article.
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