You spend a large portion of your life working and saving to bolster your retirement fund. Once you reach this milestone, you want to be confident that your nest egg (comprising 401(k) contributions, traditional IRA lump-sum distributions, and Social Security benefits) is sufficient to meet your needs in your golden years.
As you approach retirement age, it’s important to analyze your investment strategy and anticipate some of the costs that may deplete your savings. Here are seven expenses that could drain your retirement savings, and how to plan for them.
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Even with health insurance, out-of-pocket medical expenses can be high. “This includes prescription drugs, surgeries and long-term care costs,” said Taylor Kovar, certified financial planner and CEO of The Money Couple and Kovar Wealth Management.
Many financial experts estimate that you need to have at least $1 million saved to retire comfortably, and seniors have hundreds of thousands of dollars in medical bills to pay, shortening the amount of time even high savings can last.
How to plan: Koval says it’s a good idea to set up a health savings account (HSA) or similar fund specifically for medical expenses. “Regularly reviewing your health insurance and considering supplemental coverage can also help mitigate these costs,” he adds.
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If you own a home, this can be another major source of expense that ties up your retirement funds. “As homes age, major repairs like roof replacement or plumbing issues become more frequent,” Koval said. This is especially true if you have lived in your home for many years, as this can often lead to expensive repairs and maintenance of old features.
How to plan: Kovar recommends setting aside a home maintenance fund and conducting regular home inspections to help predict and spread these costs.
Inflation can severely impact your future savings as you will need to withdraw more money to make up for the higher cost of living. “This can be particularly troublesome if your portfolio consists of fixed-income strategies that are unable to keep pace with inflation by growing income over time,” said Jeff Busch, partner and investment advisor representative at Lift Financial.
How to plan: To mitigate inflation, you may want to invest part of your portfolio in stocks, which have historically provided better returns than bonds and cash, Busch said. Overall, maintaining a diversified portfolio can be a big help in the long run, he added.
From student loans to cell phone bills, many retirees find themselves helping out their adult children and even grandchildren financially. Unfortunately, this is the opposite of creating intergenerational wealth and can lead not only to depleted retirement accounts but also to debt during fixed-income years.
How to plan: Koval said it’s important to set boundaries and have open financial discussions with family members to ensure the support doesn’t derail retirement plans.
Once you start taking money out of your retirement account, you’ll need to pay tax on earnings and distributions (in most cases). You may also have to pay taxes on some of your Social Security benefits. Bush said that because many retirees live on fixed incomes, high taxes can immediately reduce take-home pay. That’s why tax planning is critical for retirees.
How to plan: Busch says one way to help offset taxes in retirement is to convert your retirement account to a tax-free account using a Roth IRA conversion. “This strategy converts your taxable retirement accounts into future tax-free withdrawals,” he explains. “If you’re still in the accumulation phase of your plan, you may want to consider investing your retirement savings contributions in tax-free investments, such as a Roth IRA or a Roth 401(k).” It’s also a good idea to talk to a professional to optimize your tax strategy.
At age 65, your retirement savings goals will go into full action mode, so it might be a good idea to invest some of your money in higher-risk market securities. While this can lead to greater returns, short-term market downturns can severely impact your retirement savings, “especially if they occur shortly before or during retirement,” Busch says.
How to plan: If you’re retired or approaching retirement, Busch recommends putting at least three years’ worth of income into a low-volatility account that can produce stable results. This gives the remaining assets in your portfolio time to recover during a market downturn and prevents you from having to liquidate assets at a loss to provide income. “Rebalancing your portfolio as needed will also help align your assets with your income needs and manage market risk.”
For better or worse, thanks to advances in healthcare and technology, people are living much longer than before. While this may mean you can spend more time enjoying your golden years, it also means you’ll have more total lifetime expenses. “Many people are already living into their 90s and even 100s, so planning for a longer retirement than you expect is critical,” says Kovar.
How to plan: To cope with the increased cost of living associated with longevity, Kowal recommends retirees take the following steps:
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Always have an emergency fund.
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Regularly review and adjust your financial plan to accommodate life changes.
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Consider long-term care insurance and other policies that can offset substantial unexpected costs.
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Stay informed about financial trends, especially those related to retirement.
Caitlyn Moorhead contributed reporting to this article.
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