Retirement is supposed to be the time to relax and unwind. But for many seniors, the prospect of retirement comes with new stress in the form of unexpected expenses and unforeseen costs. Unprepared seniors can find themselves scrambling to make ends meet.
To prepare yourself for retirement, you should be aware of the typical expenses in retirement. Here, we will outline some of the most important costs to consider when planning for your retirement as well as a few ways you can prepare before you retire to help reduce these costs and have adequate savings to cover them.
Need assistance planning for your retirement? Speak to a financial advisor from The Templeton Group at Cornerstone Financial Management today. Contact us.
Average Retirement Expenses
According to the Bureau of Labor Statistics, seniors spend more than $40,000 a year on average during their retirement. Additionally, typical retirements can last fifteen years or longer. That means a typical retiree will need a sizeable nest egg to cover these costs. From this example alone, a nest egg of $600,000 would be adequate ($40,000 x 15 years of retirement). To meet this sum, it’s important to start planning for retirement as soon as possible. Consider working with a financial advisor to build a comprehensive financial plan.
Housing is the most important and significant cost most seniors will need to plan for during their retirement. For homeowners, paying off your mortgage before retiring can help save thousands of dollars each year. Downsizing to a smaller, more affordable home can also reduce costs associated with upkeep, repairs, and homeowner’s insurance. For those seniors unwilling to let go of their existing home, finding a tenant to rent part of your space may be an effective way to mitigate your costs. Finally, if you are not planning to itemize your tax return, renting a low-cost home can help you save by eliminating costs associated with repairs, maintenance, and property taxes.
Food is a fairly stable cost that can be reduced significantly by taking a few easy steps. First, consider preparing your meals at home as much as possible to avoid higher costs associated with dining out. Second, see if you qualify for senior discounts at your local grocery store and restaurants. Look for sales on items you commonly purchase and, when reasonable, consider buying in bulk to reduce unit price if you have ample storage for your purchases and will definitely use what you buy.
Healthcare & Medicare
Many seniors are unprepared for the high costs of medical care. As we age, our need for healthcare tends to increase. Healthcare costs can add up quickly, so it’s important to start planning for them now. Take a moment to understand your insurance options, and consider speaking with an advisor to better understand which plans may be best for your needs.
While Medicare Part A typically does not have a premium attached, diagnostic and prescription coverage under Medicare Part B and Part D do have premium charges like any other health insurance plan. You will also still be responsible for your deductibles and copays. There are also costs associated with vision and dental care, among others, which Medicare does not pay for. To mitigate these costs, many seniors elect for supplemental insurance to cover gaps in their Medicare, known as Medigap plans.
Some simple ways to reduce your healthcare costs in retirement include: taking advantage of free preventive services through Medicare, purchasing Medigap plans to cover gaps in coverage, remaining active through affordable gym memberships, and switching to generic prescriptions where possible.
Everyone needs to get around, and retirement will not change that fact for most seniors. However, many seniors can expect to reduce costs associated with their daily commute like public transit, tolls, and fuel. For individuals in areas with adequate public transportation options, it may make sense to even sell your car and save thousands on automobile insurance and maintenance. With the growth of ridesharing and the potential for discounts and reduced fares for public transportation, not owning a vehicle is a more affordable and viable option than ever.
Emergencies can be financial disasters for anyone, but seniors on a tight budget are particularly vulnerable. An emergency fund should be an essential feature of any sound retirement plan, helping to cover things like an unexpected home repair or family crisis.
Entertainment & Travel
The free time that comes with retirement can be a blessing, but finding inexpensive entertainment can be challenging. Senior discounts are an easy way to save money on things like local theaters and movies, and there are many free or inexpensive activities seniors can enjoy like scrapbooking and crafting. Additionally, many museums and cultural centers are free on certain days.
For seniors itching to travel in their retirement, the associated costs should be accounted for early on in your retirement planning. Travel can be a significant expense, but there are ways to reduce your travel costs such as driving instead of flying when feasible, taking advantage of last-minute deals on lodging and air travel, and preparing your meals instead of dining out.
For seniors with a traditional 401(k) or IRA, your withdrawals will be taxed as income during your retirement. If your income is in a certain bracket, your Social Security benefits can be taxed as well. You can help reduce the money you lose to taxes through a few strategies, including:
- Waiting until you are old enough to avoid your early withdrawal penalty
- Setting up a Roth account if it makes sense for your retirement plans
- Making your required minimum distributions
- Making IRA charitable contributions
There may be other tax strategies available to you. Consider speaking with a tax specialist to define your best plan of action to reduce tax costs.
Start Planning for Retirement Today
As you can see, there are many retirement costs to plan for. Of course, you may have different needs and wants for your retirement as well. No matter your retirement goals, however, the best time to start planning is now. At The Templeton Group at Cornerstone Financial Management, our retirement planning advisors can work closely with you to build a comprehensive financial plan so you can work toward your specific needs and goals. Contact us today to request a consultation.