Being prepared for retirement is important, but many of us aren’t sure what being prepared even means. Research shows most people underestimate their retirement expenses.
Understanding your future spending habits can help you make a solid financial plan. Here are the places you’ll spend your money, and how you can make sure you’re set up for life.
After decades of building a career and raising a family, most retirees find themselves happily filling their new free time with all the things they’ve always wanted to do. This can range from travel to daily activities like golf or eating lunches out. The time spent making money is now spent spending money, and the sum of that spending comes as a shock to most people. Keeping a handle on habits like gifting, discretionary spending, and travel can make a difference.
Most people underestimate their life expectancy. Studies show that one-third of retirees live to 92. That means you’ll have to work a little longer than you expected. Cashing in for benefits as soon as you can at age 62 might be tempting, but doing that will cost you 25% – 70% on potential benefits you’d get if you wait until age 66 or 70. Those who wait until 66 get 25% more social security per month for the rest of their lives. Don’t retire before you’re ready. You’re going to be around a while.
It’s true that your body needs more care, but this becomes complicated with insurance. Everyone is covered under Medicare, but it has its limitations and many seniors find themselves paying out of pocket for expenses that were previously covered under their employer’s insurance plan. For example, after a major event, Medicare only covers 100 days of doctor-ordered rehabilitation once you’ve left the hospital. If you need more, you’ve got to fork up the money. To avoid an expense like this, make sure to get a supplemental insurance policy. Co-pays, deductibles, and state of the art medications tend to add up all the same, make sure to tuck some money aside for these expenses, too.
Many people consider their home a nest egg for the future. Either by selling and downsizing, or managing to pay off the mortgage as 70% of seniors do, the expectations are that housing costs will be quite low. But older homes require repairs, and there are peripheral costs such as property taxes and maintenance. If you’re downsizing and moving to a new area, make sure to account for new costs. Factors to consider are taxes, transportation costs, food, and home value. It’s never a good idea sell a home in a bad market, you’ll lose valuable retirement money. If you must move, think about renting your home or land until the market improves.
Retirees often look to invest their money, and that’s a good idea. Seniors can be hesitant about stocks, but a survey showed that people who established a relationship with a CPA were the least concerned during turbulence in the stock market. CPAs can help create diverse portfolios of certificates, fixed investments, a variety of stock classes, bonds, and real estate trusts, which can be beneficial for the long term. A CPA can also help control taxes. Transferring money from a 401K, which gets taxed, to a Roth account, as well as shifting investments to things like bonds will lower taxes. Make sure to set money aside for potential Social Security tax as well.