Unexpected Retirement Costs – A Head’s Up

Sometimes it’s hard to predict what expenses you will have after you retire. Since your lifestyle will change,you’re probably expecting your expenses to decrease. But here’s a list of some costs you might not be thinking about.

Kiplinger’s asked financial planners from the National Association of Personal Financial Advisors what unexpected costs people incur. Here’s a list of the 5 big ones you need to factor into  your planning.

Health care costs. The cost of health care came up most often as a top retirement challenge among retirees. According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket throughout retirement until age 92, not including long-term-care costs.

And Medicare is not free either. While Part A of traditional Medicare, which covers hospital benefits, is free, you’ll pay a premium for Part B to get coverage for outpatient services and a premium for Part D to get prescription-drug coverage. Add in the premium for a private Medigap policy, which helps cover the costs that Medicare doesn’t cover, and a couple can end up paying $6,500 a year in Medicare premiums alone.

Higher spending. You no longer have to budget for work clothes or commuting. But you may have to start paying for some things that you used to receive as perks through work, such as a company car, meals, travel or computers.

Travel. Many retirees plan to see the world in their first few years of retirement, but traveling is pricey, and the costs of transportation, lodging and entertainment can add up quickly. Travel expenses are often 10% to 20% higher than what people budget.

Using a common measure of assuming expenses after you retire will be 75% of what you spent while you were working is probably a faulty assumption these days. It’s important to sit down and write out a detailed list of your current monthly expenses and then be realistic which expenses will be gone and which new ones you’ll have in your new life style.

Social Security taxes. You mostly likely will still have to pay social security taxes even after you start collecting benefits. Up to 85% of social security benefits are taxable, and the income thresholds that trigger Social Security income taxation are low — $32,000 for a married couple, for example.

Taxes on nest-egg withdrawals. Uncle Sam not only wants a piece of your Social Security benefits, but he’s ready for his slice of your pretax retirement savings. When you withdraw money from a traditional IRA or 401(k), those dollars stashed away pretax have a tax bill attached to them when they come out of the account. So if you need $30,000 to buy a new car and you are in the 25% tax bracket, you’ll need to withdraw $40,000 from your IRA to cover the cost of the car and the $10,000 tax bill on the withdrawal.

You can read more here.