Plan for Potentially Unexpected Retirement Costs

January 8, 2021

Q: I want to retire in the next few years, what are some of the costs I should think about in retirement?

A: Depending on your long-term goals, dreams and health care needs, you may need to set aside more in retirement than you are expecting. Here are a few costs you should plan for and discuss with your wealth advisor so you can enjoy the retirement you envision.

Health Care: If you retire before Medicare kicks in at age 65, you may incur costs for private insurance medical premiums and prescription drug costs. Even if you are 65, keep in mind that Medicare only covers about two-thirds of the cost of health care services.1 You’ll likely pay out-of-pocket costs and a premium for Part B, which covers doctor visits and other services. 

Travel: It’s a good idea to integrate a travel budget into your long-term financial plan. After you’ve budgeted for the essentials such as housing, health insurance and food, then determine the discretionary budget you have left over. For example, if your annual income is $300,000 and, after paying for the essentials, you have $30,000 remaining, consider putting $10,000 or more toward travel, depending on how you prioritize getting away, and the remaining toward other goals such as saving for a second home.2

Second Home: Whether it’s a vacation getaway or an investment property, keep in mind the purchase price could be higher in a market that is in-demand. Property taxes and homeowner’s insurance could also be higher in areas where hurricanes or flooding are possible. Work with your wealth advisor to figure out how much to put away for a down payment, closing costs and, if not built into your mortgage, property taxes and homeowner’s insurance. You may also pay homeowner’s association fees and should budget for maintenance costs.3

Required Minimum Distributions (RMDs): The IRS requires you to take your first RMD from your IRA no later than April 1 of the year after you turn 72. If you miss the deadline, you could pay a penalty equal to 50% of the amount you should have taken. You also have to pay taxes on the withdrawals. To offset a potentially steep tax bill in later years, consider working with a wealth advisor to convert some of those IRA pre-tax dollars into a Roth IRA. The Roth IRA can still grow tax-deferred, and you may be able to withdraw funds tax free if you’ve held the account for five years.

Sources:

1 “Changes in Savings Needed to Cover Health Expenses in Retirement,” Employee Benefit Research Institute

2 “How to Set a Travel Budget in Retirement,” U.S. News

3 “How to Create a Savings Budget for Buying a Second Home,” thebalance.com 

4 “Retirement Plan and IRA Required Minimum Distributions FAQs,” irs.gov

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