You’ve spent a significant amount of your life working and saving to supplement your retirement money. When you achieve that milestone, you want to be confident that your nest egg, which includes 401(k) contributions, traditional IRA lump sum distributions, and Social Security payments, will be sufficient to meet your expenses in retirement.
As you approach retirement age, it’s critical to review your investing strategy and anticipate some of the expenses that could deplete your resources. Here are seven expenses that might deplete your retirement savings—and how to prepare for them.
Healthcare
Even with Medicare, out-of-pocket healthcare costs can be high. Taylor Kovar, certified financial Planner and CEO of The Money Couple and Kovar Wealth Management, states, “This includes prescriptions, surgeries, and long-term care costs.”
Many financial experts believe that you would need at least $1 million in savings to retire comfortably, and with seniors paying hundreds of thousands of dollars in medical expenditures, even large sums of money will not last long.
How To Plan:
Kovar recommends having a health savings account (HSA) or a comparable fund set aside exclusively for medical bills. “Regularly reviewing your health insurance and considering supplemental insurance can also help mitigate these costs,” according to him.
Homeownership
If you own a home, it might be another source of significant expenses that deplete your retirement income. “As homes age, significant repairs like roof replacements or plumbing issues become more frequent,” according to Kovar. This is especially true if you’ve lived in your home for a long time, as older features sometimes require pricey repairs and upkeep.
How To Plan:
Kovar advocates creating a home maintenance fund and doing frequent home inspections to assist anticipate and spread out these expenditures.
Inflation
Inflation can have a major influence on your future savings because you’ll need to withdraw more to cover the increasing cost of living. According to Jeff Busch, partner and investment advisor representative at Lift Financial, “This can be particularly troublesome if your portfolio is made up of fixed income strategies that can’t keep up with inflation by increasing income over time.”
How To Plan:
To combat inflation, Busch suggests investing a portion of your portfolio in equities that have traditionally produced higher returns than bonds and cash. In general, he added, having a diverse portfolio might be extremely beneficial in the long run.
Your Adult Children and Grandchildren
From college debts to mobile phone costs, many retirees find themselves financially supporting their adult children or grandchildren. Unfortunately, this is the reverse of establishing generational wealth, and it can result in not just depleted retirement accounts but also debt during your fixed-income years.
How To Plan:
It’s essential to set boundaries and have open financial discussions with family to ensure this support doesn’t derail retirement plans.
Taxes
Once you begin withdrawing money from your retirement accounts, you must pay taxes on both the taxable income and the distributions (in most situations). You may also have to pay taxes on some of your Social Security benefits. Busch explained that because many retirees live on a fixed income, hefty taxes instantly reduce take-home pay. That is why tax preparation is essential for retirees.
How To Plan:
According to Busch, one option to assist offset taxes in retirement is to convert your retirement savings to tax-free accounts through a Roth IRA conversion. “This strategy converts your taxable retirement accounts to tax-free withdrawals in the future,” he told me. “If you are still in the accumulation phase of planning, then you may want to consider making your retirement savings contributions to a tax-free investment such as a Roth IRA or Roth 401(k).” It can also be beneficial to consult with a specialist to optimise your tax approach.
Market Downturns
At age 65, your retirement savings goals become fully operational; therefore, it may be a good idea to invest some of your money in higher-risk market instruments. While this produces higher returns, short-term market downturns have a substantial impact on your retirement savings, “especially if they occur shortly before or during retirement,” Busch said.
How To Plan:
If you are in or nearing retirement, Busch recommends saving at least three years’ worth of income in a low-volatility account that can deliver consistent results. This provides the remaining assets in your portfolio time to recover during depressed markets, preventing you from having to liquidate assets at a loss to generate income. “Rebalancing your portfolio as needed will also help to keep your assets in line with your income needs, as well as manage market risk.”
Longevity
For better or worse, developments in healthcare and technology have allowed individuals to live far longer lives than they did previously. While this allows you to spend more time enjoying your elderly years, it also increases your overall lifetime expenses. “With many people living into their 90s or even 100s, it’s crucial to plan for a longer retirement than you might expect.
How To Plan:
To combat the increased cost of living due to longevity, it’s recommended that retirees do the following:
- Always have a rainy-day fund.
- Periodically review and adjust your financial plans to account for life changes.
- Consider long-term care insurance and other policies that can offset significant unexpected costs.
- Continuously educate yourself about financial trends, especially those related to retirement.
