You've been well-advised for decades to save enough to cover a certain percentage of your current living expenses during retirement, but what about the things that haven't been on your radar? Some experts say your living costs will go down; others think they'll stay about the same. But what you don't always hear about are the expenses that might be completely different in retirement.
Here are some of the most significant, non-obvious retirement expenses for which you'll want to be prepared.
- Medicare will not cover all of your healthcare expenses during retirement and it won't cover most long-term care needs.
- Aging in place could require home renovations you haven't considered.
- It's smart to set aside money for a future car.
- Taxes could take a chunk out of your retirement income.
- Aging relatives might need your help.
Medicare Part A, hospital insurance, is free for most people 65 and older who paid Medicare taxes while working.
Part B (medical insurance), Part D (prescriptions), and Medicare Supplement Insurance, or Medigap, will still require you to pay out of pocket. Standard Part B premiums cost $148.50 per month in 2021. The cost increases once your modified adjusted gross income (MAGI) rises above $88,000 (if you’re filing single or separately) or $176,000 (if you’re married and filing jointly). The Part B annual deductible is $203, and after that you pay 20% for most care.
Some people opt to buy a Medicare Advantage Plan (Medicare Part C) to get their Part A and Part B coverage from a private insurer instead of through Original Medicare. These plans may also cover services that Parts A and B do not, such as dental care, eye exams, and hearing aids. In this case, out-of-pocket costs vary by plan.These plans also may restrict which doctors or hospitals members use and don't work well for snowbirds and others who live in more than one location during the year.
Part D and Medigap are optional, and again, premiums depend on which plan you choose. Note that if you don't file for Plan D in a timely fashion, you may be charged a penalty for the rest of your life once you do file.
You can expect Medicare to cover about two-thirds of the cost of healthcare services during retirement, according to the Employee Benefit Research Institute (EBRI). EBRI predicts that a man who is 65 in 2020 will need $130,000 and a woman will need $146,0000 for a 90% chance of covering these costs through retirement. (Based on current average lifespans for men and women, retirement could last 18 years for a man and 21 years for a woman, according to the Organization of Economic Cooperation and Development [OECD].) The EBRI assumes median prescription drug expenses. If a couple's drug expenses are high—in the 90th percentile—together they might need $325,000.
Medicare Part A covers medically necessary skilled nursing care after a hospital stay. It also covers services such as occupational therapy, speech therapy, and physical therapy. But it does not cover long-term care when all you need is help with activities of daily living (ADL), which is the type of care many older people need, especially if they live alone.
What your long-term care costs might include
- Premiums for long-term care insurance
- Premiums for a whole life insurance policy with long-term care benefits
- Costs during the waiting period before your long-term care coverage kicks in
- Out-of-pocket costs for everything Medicare doesn’t cover if you don’t have long-term care insurance
You can estimate the costs of different levels of long-term care in your area using Genworth’s Cost of Care calculator. Genworth sells long-term care insurance and conducts an annual survey of about 20% of long-term care providers to give consumers an idea of potential costs.
Projected national median long-term care costs for 2040
- Homemaker services—$8,093 monthly; $97,116 annually
- Home health aide—$8,265 monthly; $99,180 annually
- Adult day healthcare—$2,895 monthly; $34,740 annually
- Assisted living facility—$7,766 monthly; $93,192 annually
- Semi-private nursing home room—$14,008 monthly; $168,096 annually
- Private nursing home room—$15,932 monthly; $191,184 annually
A health savings account (HSA) funded during your working years can help you cover out-of-pocket medical and long-term-care costs in retirement.
Seniors who prefer to stay at home rather than move to a retirement community may find that their home needs modifications to be safe and comfortable. Here are some considerations if you can find a way to fund them.
Home improvements to consider making as you age
- Exterior ramps and interior chair lifts to help you get up steps safely
- Walk-in tubs or showers with grip bars and nonslip flooring
- Wider halls and doorways that allow for wheelchair access
- Lower countertops and cabinets with pull-out shelves that allow you to easily reach everything
- Security and medical alert systems
Costs will depend on where you live and how extensive the work is. It's not hard to imagine spending at least $10,000 on these upgrades, but compared to the cost of moving, that could be a bargain. If you're not planning to move, you may want to budget for these aging-in-place renovations on top of the usual maintenance for roofing, plumbing, HVAC, kitchen appliances, painting, gardening, and cleaning. Home improvements done for health reasons, such as a wheelchair ramp or widening doorways are also tax-deductible as a medical expense. There are detailed rules about how much you can deduct if a particular improvement also raises the value of your home, so check with a tax expert.
In addition, Medicare covers much of the cost of some durable medical equipment (DME), such as a hospital bed, a wheelchair or scooter, or a device to lift a patient.
On the more fun side, you might also want to set money aside to update your home’s appearance since you may be spending more time at home than ever before.
Any money you contributed to pretax retirement accounts during your working years will be subject to income tax when you withdraw from those accounts during retirement.
Accounts where withdrawals are subject to income tax in retirement
- Solo 401(k)
- Traditional IRA
- SIMPLE IRA
- SEP IRA
Accounts where withdrawals are not subject to income tax in retirement
- Roth IRA
- Health savings account
Accounts where withdrawals may be subject to income tax in retirement
- Employer pensions
In addition, 50% to 85% of your Social Security benefits may be taxable if your income exceeds certain thresholds. A married couple filing jointly, for example, may owe income tax on up to 85% of their Social Security benefit if their income is more than $44,000.
|Common 2021 Federal Income Tax Brackets|
|Tax rate||Filing single||Married filing jointly||Filing as head of household|
|12%||$9,951 to $40,525||$19,901 to $81,050||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,351 to $164,900|
Table source: Internal Revenue Service.
If you drive and plan to continue driving until the day your children or the Department of Motor Vehicles forbids it, the car you own when you retire will probably not get you all the way through retirement.
You might experience an accident and have your car declared a total loss—which can happen from a relatively minor collision on an older vehicle with a low value. Your car might simply get too old and unreliable and need to be replaced. Or you might need a more comfortable car than the one you have now. There's a reason you don’t see a lot of 85-year-olds climbing into pickup trucks. Another reason to get a new car: You can buy one equipped with new safety sensor alerts, such adaptive cruise control, automatic emergency braking, and lane departure warnings that help compensate for slower reaction times or limited mobility.
You might want to set aside enough cash to buy a car outright. If that’s not an option, budget for a down payment and a monthly car payment. When you’re retired, you may still be able to qualify for a car loan based on your retirement income.
At age 65, you may be lucky enough to still have one or more parents, aunts, uncles, or siblings in your life. As they get older, they may become unable to meet all of their physical or financial needs. And if that happens, you may feel duty-bound to help.
If you can manage it, you may want to budget for a retirement that covers not just your own expenses, but also provides for the possibility of assisting someone you love. Be aware, by the way, that if your loved one qualifies–and you yourself are caring for them–you may be eligible for financial reimbursement.
The Bottom Line
Growing older and having new sources of health insurance and income mean facing circumstances you never have in the past. But you don't have to go into this new stage unprepared for the expenses that might come with it. Will you be able to afford all of them?
Maybe not. And if that's the case, you can start looking into resources that might be able to help: Medicaid for healthcare, safe transport services for seniors who can't drive, local programs that can help with home renovations, maybe even a reverse mortgage. Basically, the idea is to have some idea of which costs you might confront one day so you won't be caught off guard or make decisions now that you might regret later.
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