Popular advice for working Americans is to start saving for retirement at a young age. The earlier you begin saving means the more you’ll have in reserve when you retire.
And if you follow that rule-of-thumb, your reserve could provide a comfortable retirement lifestyle for you and your spouse. However, in retirement you should expect the unexpected. Hidden costs could be lurking around the corner.
Which brings us to today’s Just Explain It.
What four events are most likely to drain your retirement savings? And, is there anything that can be done to protect your nest egg?
1. Medical Expenses. These shouldn’t be unexpected, but they’re probably the number one threat to a retiree’s financial security. Most people don’t plan adequately for this.
Based on a 17 year retirement, a couple that stopped working last year would spend around a quarter of a million dollars on health care in retirement…and that’s if they have Medicare. Unfortunately, Medicare coverage doesn’t include vision, dental and long-term care. You might have to pay for that out-of-pocket.
But Medicare isn’t free. For outpatient services and prescription drug coverage you’ll pay a premium. If you include a Medigap policy, a couple’s total yearly expense could reach $6,500. Medigap is private insurance designed to cover the expenses not or only partially covered by Medicare.
Some financial planners suggest that retirees buy long-term care health insurance as protection. The policy usually covers care that’s not included in health insurance, Medicaid or Medicare. For example, it would cover care given to someone suffering from Alzheimer’s disease or other disabilities.
Unexpected health issues aren’t the only expenses that force seniors to dip deep into their retirement savings.
2. Unexpected Travel. For many in their golden years, surprise travel costs can take a chunk out of their savings. One-time events, like a graduations or weddings are sometimes unplanned expenses that sneak up on retirees. Caring for an out-of-state family member or friend might also require taking more money from your savings.
3. Taxes. Sudden tax hikes can also cause unwanted stress on a retiree’s finances.
According to the Tax Policy Center, tax increases this year will affect households at different income levels. A household with an annual income of $20,000 to $30,000 will see a tax increase of $297 on average. As the income increases, so do the taxes. A household pulling in between $50,000 and $75,000 will pay an average of $822 more in taxes.
4. Maintenance and Repair. Replacing an old or damaged roof, car or home appliance can drain your savings. Unanticipated expenses like these -- which are almost impossible to forecast or even avoid -- tend to add up over the years.
Experts suggest creating a rainy day fund for unexpected bills. For example, create a separate savings account and contribute to it regularly. The money can even be withdrawn directly from your paycheck. But remember that one size doesn’t fit all, and your approach is up to you. The money you save can fill in the gaps when extra cash is needed. In the end, it will help keep your budget balanced, and your mind at ease.
Did you learn something? Do you have a topic you’d like explained? Give us your feedback in the comments below or on Twitter using #JustExplainIt.
- Investing Education