Many workers assume that once they retire, they’re spending naturally go down. This notion is so widely accepted that it’s not uncommon for workers and financial professionals to account for a reduction in spending when trying to calculate a retirement savings goal.
However, the assumption that spending will naturally decrease in retirement is not always correct. In fact, many retirees find that their spending actually goes up after they stop working. If you’re relying on a reduction in spending to meet your retirement goal, you may have to take some proactive steps to make it happen. To do that, it’s important to understand some of the factors that can inflate retirement spending.
Below are a few of the reasons your spending could even increase after retirement. Consider these factors in your retirement planning so you won’t face a nasty surprise.
Once you retire, you will may have more money and free time at your disposal than you’ve ever had in your life. For many people, that can be a dangerous combination. It can be easy to fill the void in your schedule with things like shopping trips, vacations and expensive new hobbies.
A helpful strategy is to develop a projected retirement budget. Estimate your fixed costs and your potential income. Then work backward to determine how much money you can reasonably spend on discretionary or “fun” expenses like shopping, travel and more.
There’s nothing wrong with enjoying yourself in retirement. However, you don’t want to spend so much in the early years of retirement that you threaten your financial stability in the later years.
Your transition from employer-sponsored health insurance to Medicare could be full of surprises. That’s especially true if you had a generous employer plan. While Medicare is a valuable resource for retirees, it doesn’t cover everything. Many retirees are often surprised to learn that basic services, such as dental checkups, aren’t covered under Medicare even though they’re covered under most employer plans.
Even with Medicare coverage, you will likely pay a significant amount for out-of-pocket health care expenses. Medicare often only covers a portion of the cost of most services. In fact, Fidelity estimates that a 65-year-old couple who retired in 2016 will need $260,000 to cover health care costs in retirement.1 That figure includes things such as premiums, deductibles, copays and costs for services not covered by Medicare.
One way to prepare for these expenses is with a tax-advantaged health savings account (HSA). An HSA offers tax-deductible contributions and tax-deferred growth, along with tax-free withdrawals that can be used toward medical costs during retirement. You may also want to consider a supplemental policy to fill in the gaps in Medicare coverage.
Many people don’t plan for taxes in retirement. They assume that because they stopped earning income, their taxes will likely go down.
Your taxes may decrease in retirement, but you may feel their pinch a bit more. However, your out-of-pocket tax costs could increase. During your working years, your taxes are likely withheld from your paycheck, so they may not be noticeable. After retirement, you will pay taxes on a wide range of income sources, including Social Security, pension payments and retirement account distributions. If you don’t plan and budget for taxes, you may have less spendable income than you’d anticipated.
Ready to develop your retirement spending plan? Let’s talk about it. Tommy Mai Financial can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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