7 Spending That Can Eat on Your Retirement Savings – Motley's Fool

If you save and invest diligently for your retirement and have carefully accumulated a substantial nest egg, you would be horrified to see bites that you would not have planned. Most of us will depend on our own savings for a significant portion of our retirement income, and this money will have to last a long time.

After all, if you retire at 65 and you live at 95, you will have 30 years of retirement and every dollar will be important. Here are seven common expenses that can reduce your retirement savings – before you retire and / or retire. Learn more about them and aim to keep them to a minimum.

N ° 1: Health

It is not surprising that health care costs can torment retirement. In total, 44% of retirees found that health care expenses in retirement were slightly higher (27%) or much higher (17%) than expected, according to the 2018 survey on retirement trust. So how much are we talking about?

A 65-year-old who is retiring today can expect to spend an average of $ 280,000 in health care expenses during retirement, by Fidelity Investments – not including the cost of health care. long duration. A different report from Boston College's Center for Retirement Research says that on average, retirees will face health care expenses of $ 4,300 a year.

What you pay for health care in retirement is not entirely under your control, but it are some ways to keep it in check. To begin, stay fit and healthy and stay in that state for as long as you can because it can reduce your chances of developing expensive conditions. Also be smart about Medicare, choosing the plans that will help you the best.

No. 2: High Interest Rate Debt

High interest rate debt, as in credit cards, can also reduce you considerably, whether you are retired or in the years to come. Many cards charge their owners interest rates of 20% to 25% or more. If you have a debt of $ 20,000, that means you will make more than $ 4,000 to $ 5,000 a year, just for interest. This money will not even pay off your debt. It is money that could have helped your retirement nest egg to grow or that would have been used productively.

Try to pay off all your high interest rate debt as soon as possible. (And by the way, you can do it – many people have paid huge debts.) Icing on the cake, when you make a payment against debts, you basically get a guaranteed return on that money, regardless of the interest rate. So, if you pay $ 10,000 on which you are charged an 18% interest, it's as if you earn 18%, because you will not pay 18% of that amount.

N ° 3: Fees

Regardless of your age, it's important to know what fees are charged to you – from your banks, brokers, credit cards, mutual funds, and so on. For example, consider mutual funds. The ratio of median fees (annual fee) mutual funds to shares in 2017 was 1.18%, according to the Investment Company Institute, many investors being charged even more than that. At the same time, large market index funds, such as those following the S & P 500 Index, carry an annual fee of 0.10% or less.

The table below shows the effect of investing $ 10,000 each year over different periods and achieving an average annual return of 10%, while paying an annual fee of 1.1% or 0.1%.

Calculations by author.

The difference that a percentage point can make is striking: it costs tens of thousands of dollars over several years, even hundreds of thousands of dollars.

N ° 4: Taxes

It is not surprising that you are paying taxes in retirement, but you may be surprised to learn that your social security benefits may be taxed. These benefits are generally do not tax, but taxation can hurt if your income over a year includes not only social security benefits, but also other important sources, such as wages, income from self-employment, interest, income dividends, etc. You will never be taxed on more than 85% of your Social Security benefits, and if benefits are the entire or the vast majority of your income, you will probably not be taxed at all.

To determine if you need to pay taxes on social security benefits, you need to calculate your "combined" income, which is your adjusted gross income ("AGI"), non-taxable interest and half of your benefits. social. The table below shows the taxes you can expect:

Source: Social Security Administration.

If you work late in life and do not do it need If you have Social Security income while you work, you'd better delay the start of the collection. This will increase your social security benefits. One way to handle this might be to draw more on ARIs and 401 (k) s in early retirement years if you are still working.

N ° 5: Your mortgage

As stated above, it is imperative to get rid of its high interest rate debt, but even a low interest rate debt can be fraught with retirement when you will probably live with a limited income . If possible, try to retire once you have completed your mortgage payments. As an owner, you will still have home-related expenses, such as property taxes, home insurance, maintenance and repairs, but you will probably feel more free and more financially once your house will be paid.

Speaking of mortgage, if the money is particularly tight in retirement, you may want to consider a reverse mortgage. With a reverse mortgage, a lender will generate a stream of income (often tax free) and the loan will not have to be repaid until you no longer live at home – like when you move to a retirement home or die. This has disadvantages, such as forcing your heirs to sell the house unless they can afford to repay the loan. Nevertheless, if you need extra income in retirement and no one is relying on your home, this can be a solid income solution.

N ° 6: Your children

Your children can bring a lot of joy in life, but they can also destroy your retirement. According to a survey conducted by Merrill Lynch and Age Wave, at least four in five parents provide financial support to their adult children – they spend twice as much for their children as for their retirement savings. A TD Ameritrade survey found that on average, millennials' parents received about $ 11,000 a year (in cash and unpaid work) from their own parents.

It can be hard to say no, of course, or watch your adult children struggle. But if you send, for example, $ 10,000 to your children each year, you do not change your retirement coffers. This amount, if it increased at an average annual rate of 8%, would represent more than $ 156,000, a much appreciated amount at retirement.

One way to avoid this scenario if your children are still young is to familiarize them financially as they grow up. Share your personal money management processes and think about them regularly – perhaps by asking them to watch you pay bills and think about a big purchase. Bring them to appreciate the power of compound growth and start investing in certain stocks while they are still young. With a little luck, they will eventually be able to help you retired – or at least not needing your money.

# 7: The unexpected

At retirement and at any time before, unplanned developments can wreak havoc on your finances. A 2015 Pew Charitable Trusts report found that 60% of US households "had suffered a financial shock" compared to the previous year, about a third of them two. The median cost of the most expensive household shock was $ 2,000, or about half a month of income, and more than half of the households were struggling to make ends meet after suffering their shock.

If you are retired and you have a stock of money to support yourself, you may find that you only need to use this fund for unexpected major repairs or repairs. 39, other sudden needs. However, be careful not to make your nest egg insufficient to support you as long as it is necessary.

A good way to protect yourself against unforeseen financial needs is to have an emergency fund, ideally endowed with 6 to 12 months of living expenses, such as food, rents or mortgages, utilities, taxes, insurance, transportation etc. sure. This can be part of your overall nest egg, but make sure that it is readily available if you need it and that it does not require liquidation of shares that may have temporarily been losing value or the premature collection of a CD, under pain of sanctions.

Just as it is essential to plan your future by determining how much money you will need in retirement and how you will get it, you must also prepare yourself and defend yourself against the above-mentioned expenses that can reduce these savings.