Typically, the assumption is that when you retire your expenses will decrease by about 20-30%. You will stop spending as much on things like gas, eating out, or a pricey business wardrobe. Plus, the kids are out of the house and supporting themselves, and to top it off there are no more contributions to a 401(k), Social Security, or Medicare.
But even with fewer demands on cash flow, there are a number of items that can blow up your budget in retirement.
Almost two-thirds of Baby Boomers are not confident they will have enough money to handle their medical expenses during retirement. The Center for Retirement Research at Boston College researchers revealed that a healthy 65 year old couple will incur approximately $200,000 in health care expenses during the remainder of their life.
Be especially diligent when it comes to non-covered medical expenses. If it is safe to do so, one strategy to reduce the burden is aggregating these expenses into one calendar year and taking a tax deduction. People age 65 or older may deduct medical expenses exceeding 7.5% of their adjusted gross income. Reach out to your tax professional when making big medical decisions like this.
Everyone’s situation is going to be different, and the notion that taxes will be lower in retirement is not always true. For example, if the majority of your money is in tax-deferred retirement plans, things like IRAs or 401(k) plans, you might actually find your income going up.
These types of retirement accounts are subject to Required Minimum Distributions (RMDs) once you hit age 70 ½. If RMDs cause you to withdraw more from the accounts than you were previously, your income and your taxes may be pushed higher.
Be sure the decisions you make correctly reflect the tax environment you will be in. Connect with your tax professional to review your situation and plan accordingly.
Many people postpone traveling during their working years due to overloaded schedules, younger kids, and competing priorities. Once retirement comes, all those vacations you’ve put off beckon, and with them-increased expenses.
There is usually a significant uptick in travel costs in the first few years of retirement. With an open calendar and access to your investments there’s nothing holding you back! Generally travel slows down as the desire to explore and see new sights is satiated and energy levels decrease with age.
Two significant dangers creep in with travel expenses. The first is the “Dream Vacation” mindset. This is where the chips are cashed in and budgets are thrown to the wind. People will justify overpaying for a dream vacation since they’ve had to wait so long. The second is the “Friends and Family” travel plan, where you pony up for everyone else’s travel expenses and give them a free ride.
By all means, take that dream vacation! But take the time to shop around and find good deals. As a retiree, you also have an open calendar and with it the opportunity to travel during low volume travel months, which can save big-bucks. When it comes to friends and family, invite them along when appropriate. But be diligent to set expectations on what you will and won’t pay for. After all–you’re not an ATM.
This is everything you’ve put on the back-burner until retirement that you couldn’t quite justify during your working years. Maybe it’s that cooking class you didn’t have time for, or the Harley that’s been calling your name for years. Just remember, the same disciplined habits that allowed you to retire are the ones that will help you navigate the years ahead.
In retirement, it’s more important than ever to keep a close watch on expenses.
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