If you have been saving and investing diligently for your retirement and have carefully accumulated significant savings, you would not want to be bitten off that you did not expect. Most of us will rely on our own savings for a significant portion of our retirement income, and that money will have to last a long time.
After all, if you retire at age 65 and live at 95, that means 30 years of retirement, and every dollar will be important. Here, then, there are seven common expenses that can reduce your retirement savings, before you retire and / or are retired. Learn more about them and aim to keep them to a minimum.
No. 1: Health
It is not surprising that health costs can torpedo retirements. 44% of retirees found that health expenses in retirement were somewhat higher (27%) or much higher (17%) than expected, according to the Retirement Trust Survey of 2018. So, what are we talking about?
A 65-year-old couple who retires today can expect to spend an average of $ 280,000 out of pocket on health care expenses during retirement, for Fidelity investments, and that does not even include long-term care expenses. A separate report from the Center for Retirement Research at Boston College finds that, on average, retirees will face annual health care expenses of $ 4,300 per year.
What ends up paying for medical care in retirement is not totally under your control, but are Some ways to keep it under control To begin, get fit and healthy and stay that way as long as you can because that can lower your chances of developing costly conditions. Be smart about Medicare, too, by choosing the plans that will best serve you.
No. 2: Debt with a high interest rate.
Debts with high interest rates, such as those found on credit cards, can also sink you financially, whether you are retired or still have years to go. Many cards charge their holders interest rates of 20% to 25% or more. If you have a debt of $ 20,000, that means you would be paying between $ 4,000 and $ 5,000 per year, just for interest. That money will not even pay your debt. That's money that could have helped your retirement grow or have been used in another productive way.
Try to pay off all debts with interest rates as high as possible. (And by the way, you can do it: many people have paid massive debt burdens.) As the icing on the cake, when you make a payment against the debt, you essentially get a guaranteed return on that money, whatever the interest rate may be. Therefore, if you pay $ 10,000 for which you were charged 18% interest, it is like getting a return of 18%, because you will no longer have to pay 18% of that amount.
No. 3: Fees
No matter how old you are, it is important to know the rates charged by your banks, brokerages, credit cards, mutual funds and more. As an example, consider mutual funds. The average expenditure ratio (annual fee) of mutual stock funds in 2017 was 1.18%, according to the Institute of Investment Companies, and many investors were charged even more. Meanwhile, broad market index funds, such as those tracing the S & P 500, can be found with annual rates of 0.10%, and even less.
The following table shows the effect of investing $ 10,000 each year in different periods and obtaining an average annual return of 10%, while paying 1.1% or 0.1% in annual installments.
During this time
Growing to 8.9%.
Growing to 9.9%.
$ 1.5 million
$ 1.8 million
The difference that a single percentage point can make is surprising, since it costs tens of thousands of dollars over many years, possibly even hundreds of thousands of dollars.
No. 4: Taxes
It's not surprising that you pay taxes in retirement, but you may be surprised to learn that your Social Security benefits may be subject to tax. These benefits are generally do not taxes, but taxes can increase your ugly head if your income for a year includes not only Social Security benefits, but also other important sources, such as salaries, self-employment income, interest, dividend income, etc. You will never be taxed for more than 85% of your Social Security benefits, and if the benefits make up the majority or the vast majority of your income, you probably will not be taxed on them.
To determine if you will have to pay taxes on Social Security benefits, you must calculate your "combined" income, which is your Adjusted Gross Income ("AGI") plus non-taxable interest plus half of your Social Security benefits. The following table shows the taxes you can expect:
Percentage of taxable profits
Between $ 25,000 and $ 34,000
Up to 50%
Married, presenting together
Between $ 32,000 and $ 44,000
Up to 50%
More than $ 34,000
Up to 85%
Married, presenting together
More than $ 44,000
Up to 85%
If you are working late in life and not need that income from Social Security benefits while you work can do well to delay the start of collection. That will increase your Social Security benefits. If you are still working, it could be a way of managing it to resort more to IRA and 401 (k) in the years of early retirement.
No. 5: your mortgage
It is imperative to get rid of your high interest rate debt, as noted above, but even a low interest rate debt can be burdensome in retirement when you will probably live with limited income. If possible, try to enter retirement after you finish making mortgage payments. As an owner, you'll still have to pay for home-related expenses, such as property taxes, home insurance, maintenance and repairs, but you're likely to feel freer and more financially once you've canceled your home.
Speaking of mortgages, if money is particularly difficult in retirement, you may want to consider a reverse mortgage. With a reverse mortgage, a lender will provide a flow of income (often tax-free) and the loan will not have to be repaid until you no longer live in your home, such as when you move into a nursing home or die. However, it has some drawbacks, such as requiring your heirs to sell the house unless they can repay the loan. However, if you need additional income in your retirement and no one has the inheritance of your home, it can be a solid solution for income.
No. 6: your children
Your children can bring a lot of joy to life, but they can also ruin your retirement. According to a survey by Merrill Lynch and Age Wave, 4 out of 5 parents offer some financial support for their adult children, spending twice as much on their children as they do on retirement savings. A survey by TD Ameritrade found that, on average, millennial parents received around $ 11,000 annually (in money and unpaid labor) from their own parents.
It can be hard to say no, of course, or see how your adult children struggle. But if you are sending, say, $ 10,000 to your children each year, you are changing your retirement funds. That sum, if it grew at an average annual rate of 8%, would amount to more than $ 156,000, a very welcome sum in retirement.
One way to avoid this scenario if your children are still small is to make them have financial knowledge as they grow. Share your personal money management processes and think about them regularly, perhaps making them watch you pay your bills and think of a big purchase. Make them appreciate the power of compound growth and start investing in some stocks while they are still young. With a little luck, they will eventually be able to help you in retirement – or at least not need any of your money.
No. 7: The unexpected.
In retirement and also at any previous time, unexpected developments can wreak havoc on your finances. A 2015 report by Pew Charitable Trusts found that 60% of US households "experienced a financial shock" during the previous year, and that approximately one third of them experienced two. The average cost of the most expensive household crisis was $ 2,000, or about half a month of income, and more than half of the families had problems subsisting after experiencing the shock.
If you are retired and have a reserve of money to support you, you may simply touch that fund for unexpected repairs of major cars or other sudden needs. However, be careful not to make your savings insufficient to support you for as long as necessary.
A good defense against being marginalized by unexpected financial needs is to have an emergency fund, ideally financed with living expenses of six to 12 months, such as food, rent or mortgage payments, utilities, taxes, insurance, transportation, etc. in. It can be part of your total savings, but make sure it is readily available if you need it and does not require the liquidation of stocks that may have temporarily diminished their value or the swap of a CD prematurely and face penalties.
Just as it is essential to plan your future by calculating how much money you will need for retirement and how you will get it, you must also prepare and defend against past expenses that may affect those savings.