Some costs could rise, fall, or even disappear.
Whether your retirement is near or far away, one thing is for certain, your future will differ from your present.
Financially, that fact is worth remembering. Some of the costs you have paid regularly may suddenly decrease or fade away, while others may increase. Here are a few things that you can expect as you inch closer to retirement.
Will your insurance costs rise with age?
If you’re wondering if your insurance costs will go up as you age, the answer is dependent on your health, medical insurance, and more. You may find that as you age, your overall insurance expenses decline.
Yes, health insurance becomes more expensive the older you get – but those premiums are merely part of the bigger insurance coverage picture. If you stop working in retirement, you may not need disability insurance. You might even have little need for life insurance and eliminate that expense.
Additionally, in retirement, you may have paid off your home and other major debts. This means you might eliminate your mortgage insurance cost as well. Finally, rather than drawing income from work, you will be drawing it from investments and Social Security. All these factors will contribute to your overall insurance costs decreasing in retirement.
You can expect your medical expenses to increase
Although your insurance costs may decrease, you can likely expect your medical expenses to increase, even if you’re in good health. The amount will vary per household, but perhaps you have read some of the latest estimates. According to Fidelity Investments, a 65-year-old couple who retired in 2019 will need around $285,000 to cover future health care costs. This estimate assumes they live 20-22 years after they retire.
Long-term care coverage was not included in that projection. Long-term care costs an average of $4,250 per month per person for in-home care and $4,051 per month in an assisted living facility. These numbers are expected to increase in the coming years by about 3% per year. If you are 40 years old now and go into assisted living at age 70, your monthly costs will likely exceed $10,000 per month. A long-term care policy that covers three years of care at $6,000 a month would cost the couple just over $3,000 per year if they start paying at age 55. This means that they will pay $45,000 for their insurance over time, rather than paying hundreds of thousands of dollars for long-term care at the end of their life.
How about your income taxes?
If you live on 70-80% of your end salary in retirement – which is not unusual – then you may find yourself in a lower income tax bracket. Yes, your Social Security income may be taxed – but, even in the worst-case scenario, no more than 85% of it will be taxed.
If you have invested using a Roth IRA, you will be looking at some tax-free retirement income – provided, of course, you have owned the IRA for at least five years and are older than 59½ when you start making withdrawals.
Will your housing costs fall?
Over the long term, some of your housing costs may decrease. Some retirees own their homes free and clear and others nearly do. Homeowner association fees and property taxes must still be paid, so, while that mortgage balance may be gone or nearly gone, other recurring costs will remain.
Homes inevitably need repairs, so, in some random year, you may find your housing costs jumping. Downsizing and moving into a smaller home can also mean a short-term rise in your housing expenses. If you do downsize and move, you will hopefully relocate to an area where housing costs are lower.
Will you face education costs?
According to the Consumer Financial Protection Bureau, people over 60 are the fastest-growing segment of the population with student loan debt. This is typically not because of their educations, but because they’ve taken on student loans to help their children pay for their degrees. That expense could linger into your retirement – a valid reason to reject taking on student debt in the first place.
Having student loans can seriously harm your retirement plan. You could have to delay retirement or see a good chunk of your fixed-income go to paying off loans each month. This will inevitably affect your retirement lifestyle.
One “cost” may disappear, leaving you with a little more money each month
Once retired, you won’t have to save for retirement each time you get paid. So if you are assigning 10% or 20% of your paychecks to your retirement accounts, you may be pleasantly surprised to find that money back in your wallet (so to speak) after you transition into your “second act.”
The bottom line
Retirement is meant to be enjoyed rather than spent worrying about money. While healthcare and long-term care costs can seem daunting, having the right insurance in place can help give you peace of mind. Additionally, eliminating debt and investment payments can help you to better use your fixed income in retirement.
If you need additional guidance, be sure to reach out to our team of financial advisors. We can help you plan for retirement and leave a legacy that will last for generations.