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Retirement planning is complicated because there are many approximations. It is easy to feel overwhelmed when trying to estimate your life expectancy and basic living expenses, which may lead you to overlook other key factors that affect the amount of money you spend on living. money you will need.
Here are three factors that should definitely be included in your retirement plan. If your current plan does not take them into account, you must make changes.
1. Inflation
The cost of living increases with time. Therefore, what is enough to cover your living expenses today will not cover them in 10 or even five years. If you did not consider inflation in your retirement plan, you will end up with a shortage of money in your later years.
Source of the image: Getty Images.
Inflation, like most factors that influence your retirement, is impossible to predict accurately. The best we can do is look at historical data and make informed assumptions about the future. The classic wisdom is to assume an inflation rate of 3% per year.
So, if your living expenses rise to $ 40,000 this year, do you anticipate that they will rise to $ 41,200 the following year, to $ 42,436 the following year? next year, etc. However, this is just an estimate. If you want to be on the safe side, consider using an annual inflation rate of 4% instead of adding an extra cushion. Many retirement calculators already take into account inflation or allow you to establish an estimated inflation rate. You do not have to do all this calculation yourself for every year of your retirement.
2. Health expenses
A 65-year-old who retires in 2018 will need about $ 285,000 to cover her retirement health expenses, according to Fidelity, and some sources are even higher. HealthView Services estimates that a 65-year-old couple who is retiring today may need $ 363,000 to cover retirement-related health expenses. These figures do not include some expenses, such as long-term care or dental care. If you need these services, expect your health care costs to increase even more.
Medicare will cover some of your retirement health expenses, but there are still some deductibles, premiums and coinsurance to pay out of pocket. In addition, there are things that are not covered at all, such as dental care, long-term care and hearing aids. You will need to find a way to cover these costs yourself or take out additional insurance to fill the gaps in coverage.
If you have not planned the cost of health care in retirement, the time has come. Consider increasing your retirement contributions to account for the extra money you will need to fund your health care expenses. You can also open a health savings account (HSA) if your health insurance is a high deductible health plan (HDHP). Contributions to these accounts reduce your taxable income this year, they never expire and the money is tax free when you use it for eligible health expenses. Those who believe that they may be in need of long-term care should also consider taking out a long-term care insurance policy. And of course, you must prioritize your health at every age to reduce your health care expenses.
3. taxes
Unless you have all your retirement savings in Roth accounts, you will have to pay taxes in retirement. If you have not planned to pay tax on your retirement income, you could exhaust your retirement savings faster than expected. But you can not know how the tax brackets will change or how much you will need to cover your living expenses each year.
The good news is that many retirees spend less on retirement and some end up in a lower income tax bracket than when they were working because they no longer earn a salary. In retirement, you choose the amount of money to withdraw from your savings each year to live, which allows you to somehow control the slice of taxation in which you find yourself. Usually, the living expenses of a retiree decrease compared to their younger days, where they paid their bills, raised their children and spared for their future at the same time.
You can estimate your taxes in retirement by calculating your projected taxable income at retirement and looking at the current tax brackets, but keep in mind that these may change. If you are worried about not being up to it, you may want to reserve more than you need, just to be safe. Working with a paid financial planner is another option if you are intimidated by the tax aspect of retirement planning.
You do not want to reach retirement and discover that you have not spared enough to cover your living expenses. If your current pension plan does not take into account inflation, health care or taxes, save some time to develop a new plan including them. When you reach retirement, you will be grateful to have done so.
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