About 10,000 baby boomers turn 65 every day, and though the prospect of retirement is appealing, as a retiree, you might need to prepare for more than you might expect. According to an AAG survey, 53% of seniors said the cost of living is higher in retirement than they expected. This is especially relevant now, as two-thirds of older Americans are worried that inflation will have a negative impact on their retirement.
There’s no magic number for how much retirees should have in savings. Financial experts say it’s wise to plan to live off 55%-80% of your annual pre-retirement income for a comfortable lifestyle, but that’s a wide range. To give you a better idea of how much to save, GOBankingRates spoke to financial experts to find out some cost-of-living expenses that might end up being more than retirees are expecting. Here’s what they had to say.
When thinking about what to budget for after retirement, people are usually thinking about recurring expenses like mortgage costs and grocery expenses. However, Doug Dahmer, the CEO and founder of Retirement Navigator, said you might want to think about the expenses you can’t anticipate. “When planning for retirement, most people are attempting to find the answer to the questions of ‘How much is enough?’ and ‘Am I going to be OK?’ They often fail at identifying future lump sums such as replacing vehicles, [and] unexpected house repairs like roofs and furnaces.” One trick economists recommend for housing costs: Budget 1% of your home’s total value for annual repairs and maintenance.
When budgeting, don’t assume you’ll spend the exact same amount every year. Have some cushioning that can support something going wrong. Dahmer said people who have more flexiblity will be better prepared to retire. “Embracing the variability of year-to-year cash flow requirements provides all sorts of benefits, including arriving at a much more accurate assessment to knowing how much will be enough when they retire.”
Staying healthy during retirement age is very important, but those healthcare costs can really add up. Although most people pay $0 for Medicare Part A insurance (which covers hospital bills), depending on what you qualify for, you can end up paying more than $500 a month for it. For standard medical insurance, or Medicare Part B, you’ll pay $164.90 each month. If you’re considered a high-income retiree, you’ll pay an additional fee on top of that. Since your employer was probably covering your insurance before, this potentially extra $600-plus can come as a huge shock.
It’s also important to note that not everything is covered in Medicare Part A and Part B. You might have to spring for additional insurance plans or costs to make sure all of your needs are covered. That’s why it’s important to have some room in your medical budget to cover the unexpected.
Though seniors often qualify for tax breaks, including medical expense deductions and retirement plan contribution benefits, you’ll be taxed if you take money out of your 401(k) or IRA before the appropriate age. If you want to retire before you’re 59 1/2 and you withdraw money from your 401(k) or IRA, you’ll have to pay 10% in taxes on the money you take out.
One of the best parts of retiring should be the free time you have to do what you’ve always wanted. One of the things on your bucket list might be travel. However, because of inflation, travel costs might be much higher than they were the last time you took an excursion. “Up until the past two years, inflation was the reality that many people were not incorporating into their plans. We had seen very little inflation in the past 10-15 years,” said Dave Goodsell, executive director at the Natixis Center for Investor Insight.
Even if the economy levels out, it’s still important to plan for a price hike during your retirement years. Set aside what you normally spend on vacations, plus a few hundred dollars more. “Even as it ebbs now, it’s important to remember just how much it can impact you, especially when you are on a fixed income,” Goodsell said.
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