Retiring has become a bigger challenge over the past few years due to declining asset values, high unemployment and a volatile stock market. 401(k) plans have been hit, and fixed income investments are yielding very little due to historically low interest rates. Many companies are changing or eliminating pension plans, forcing employees to invest and save more for their own retirements. (For related reading, see 5 Ways To Fund Your Retirement.)

TUTORIAL: Retirement Planning

In this environment, it's more important than ever to figure out what you'll need in your senior years. Good planning goes a long way to ensuring financial security, but even the best laid plans can be upset by unexpected events. Depending on your personal circumstances, you may incur expenses that exceed those on this list.

Medical Costs
This is the real wild card in trying to estimate your future out-of-pocket expenses, especially with the turmoil in Washington over how health care should be funded and what role the federal government should play.

Start by understanding the coverage provided by Medicare and the premiums, copays and deductibles. Many people buy a private insurance policy to provide supplemental coverage for the gaps left by Medicare. The type and amount of insurance should be based on your known health risks, genetic history and your financial ability to assume additional risk.

It's no secret that the cost of health care is in an upward spiral, including the cost of prescription drugs, dental care and optical care. If you can afford routine medical expenses out of your pocket, consider purchasing a catastrophic policy that only kicks in after a sizable deductible is paid. Take the premium savings and tuck them away to help pay that deductible if needed.

Home Maintenance or Rent
Your home is aging too, and the older it gets the higher the repair bills will get. Some of the most likely expenses include a new roof, window repair or replacement, painting, and appliance replacement. Try to put your home in resale condition before you retire to minimize future surprises.

Over time, you'll probably have to hire someone to do those chores you used to do around the house. If you become physically unable to do them, include money in your budget for lawn mowing, yard work, snow shoveling and housekeeping. Rents rarely go down and almost always go up. If you rent or plan to upon retirement, you need to factor in escalating rents.

Taxes and Distributions
When you withdraw funds from your 401(k) plan, you'll be assessed income tax at the current rate. After age 70.5, most retirement plans require minimum annual distributions or you will be subject to a penalty. This must occur no later than April 1 in the calendar year after you reach this milestone. If you work past the age of 70.5, then the first mandatory distribution is extended to April 1 of the year after you retire. The distributions are reported annually to the taxpayer and the IRS.

After 70.5, contributions can still be made to Roth IRAs, but not to regular IRAs. You can also continue making contributions to employer-sponsored pension plans as long as you are still actively working. You might consider pre-paying income tax on a portion of your retirement savings using a Roth IRA or Roth 401(k).

TUTORIAL: How To Manage Credit And Debt

Unless you get a part-time job or have enough hobbies, you'll find that you have a lot of extra time on your hands. The recession has helped to keep travel costs down, but you can't count on those prices staying down indefinitely. As demand for gasoline rises around the world and the supply of oil shrinks, the long-term cost of gas is likely to increase. Retirees tend to socialize more at restaurants and country clubs, and join organizations that often charge a membership fee. While these may not seem expensive, the costs of these activities add up over time.

The goal of most retirees is to enjoy their children who are now out of the house and on their own. However, the economic environment and high unemployment rate has put many of those people in the position of having children at home longer than they expected.

Escalating college costs are another large budget issue, especially for those people who had children later in life and didn't save enough when they were working full time. Grandparents also tend to spend more on birthdays, holidays, weddings, graduations and other special occasions. All those family visits need to be factored into the travel budget.

The Bottom Line
Everyone's situation is different, so you may have other big expenses that need to be part of your budget plan. If you do a lot of driving, that could mean higher fuel bills, regular car repairs, new tires and a new car every few years. Food prices are on the rise and world demand will likely keep pushing them higher. If you have pets, remember to budget for their care when you travel.

If you decide to retire in a new location, make sure you understand the living costs unique to that area. If you move south, you will save on snow removal and heat, but that could be more than offset by air-conditioning. Insurance rates can be higher if you move to an area with extreme weather, more crime or greater distance from emergency services. Many housing developments and retirement communities also require monthly homeowners' association fees. (For additional reading, take a look at Will Your Retirement Income Be Enough?.)

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