Many people entering retirement assume their cost of living will decrease.
Without the expense of daily commutes, pricey lunches, and maintaining a work wardrobe, life is bound to get less expensive. Add to this an end to withholding for 401(k) plans and Social Security, and you should see a boost in your pocketbook, right? Not necessarily. While some lifestyle changes that come with retirement can indeed cut your costs, you’re likely to develop new spending habits that bring with them some new expenses. Before you ride off into the sunset and assume you’re set for life, it’s a good idea to understand how your financial picture may change once your working years are behind you.
Here are six areas where spending can potentially rise in retirement:
Particularly in the early years of retirement, your travel expenses could skyrocket. With more leisure time on your hands and the exhilaration of newfound freedom, the places you’ve always wanted to see may beckon you. And if your children and grandchildren aren’t local, you may be looking forward to visiting them more often.
How you can save: Your job-related commuting expenses will no longer be a factor, so whatever you were spending there each month can be applied to your new travel budget. Reap the maximum savings possible by researching to find the best rates and promotions for hotels, airfare and auto rentals. Senior discounts are often available, as well, and many times they can be applied on top of other promotional offers. Retirees tend to have more flexibility with travel dates and times, which can give you a great edge in snagging the best deals.
Because your income will probably go down in retirement, you may be assuming your taxes will be reduced, too. But if you have significant assets in retirement plans such as traditional IRAs and 401(k)s, you may be unpleasantly surprised to see your tax bill soar as a result of their required minimum distributions (RMDs). And if your social security income exceeds certain limits, you may be responsible for taxes on it, as well.
How you can save: If you haven’t reached the age for RMDs yet, diverting funds from traditional retirement plans into a Roth IRA can help because these transfers reduce future RMDs that can put you in a higher tax bracket. Otherwise, be sure to enlist the aid of a qualified financial advisor to run various scenarios that can help determine the best way to reduce the tax impact. Depending upon where you live, reductions in property taxes may also be available for seniors.
In the later years of retirement, you may find that your healthcare costs are taking a bite out of your nest egg. While Medicare pays for many health-related expenses, it doesn’t fund a number of costly things that your employer-paid health insurance probably did. Dental care, vision care, hearing aids, and podiatry care, for example, are not covered under Medicare.
How you can save: It’s best to put extra money aside for these expenses in your retirement budget, as they tend to be big-ticket items down the road. If you incur substantial medical costs in a single year, you may be entitled to a tax deduction. As always, consult your financial advisor to determine the most efficient and effective approach for your tax planning.
Helping family members
Many retirees find themselves coming to the financial aid of their adult children and grandchildren. In fact, more than half of American parents over the age of 55 have cut back on their retirement savings to help pay their children's bills, a 2018 Bankrate.com survey shows. From assistance with education to providing financial support in the wake of job loss or divorce, coming to the aid of family can mean a hit to your savings.
How you can save: There are ways to help your children without it becoming an undue financial burden. Start by being clear, frank and firm about how much you can contribute. If an adult child moves back into your home, they should help out with regular expenses such as utilities, groceries and possibly a small rent. If they can’t contribute financially, they can assist with cleaning, shopping, laundry and minor home repairs.
Whether its downsizing, upsizing, or moving to a new location, moving is a high-cost undertaking. Aside from the cost of the move itself, home improvements and preparations needed prior to sale have to be considered, as well as the expense of buying and outfitting a new home. Higher taxes may in the cards, as well, and possibly even a mortgage expense if you opt to upsize. It’s not uncommon for retirees to find their dream locale isn’t what they expected, forcing them to move yet again.
How you can save: Before choosing a retirement area, investigate it carefully for hidden costs. Talk to other retirees who live there. Research the property taxes, sales tax, the cost of groceries and other basics. Pay close attention to resale values, too. If it doesn’t seem like a relatively safe bet, consider a temporary move while renting out your current home or downsizing in place.
Now afforded the time and opportunity to support causes near and dear to their hearts, retired folks tend to be reliable donors, happy to open their wallets even in their later years. Most maintain their previous charitable giving levels in retirement, even as they cut back on other kinds of spending. If charitable giving is on your bucket list, you’ll want to find ways to donate based on your philanthropic goals while maintaining the income you need for retirement. Start slowly and ask yourself some basic questions, such as how much you want to give, for how long, and the types of charities you want to support.
How you can save: Don’t underestimate the power of your time and talent. While monetary contributions are always helpful to non-profits, many are in dire need of hardworking volunteers. If you’re in a position to make a financial contribution, narrow down the field to those causes with which you have a personal or emotional connection. But don't rely solely on your heart when deciding where to contribute. Web sites like Charity Navigator rate charities on their efficiency and transparency, providing data as to how they use their revenues. You financial advisor can help you balance your charitable instincts with some smart tax-saving strategies, such as giving to donor-advised funds and donating appreciated stock.
Positioning your savings to cover the many expenses that come with retirement isn’t easy. Our team of highly skilled advisors can help you construct a financial plan for the future that allows you to enjoy your retirement to its fullest. Please contact us to learn more.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life's uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.