Planning for retirement can be quite a challenge. It's an event that may not come for many years and that will last for decades (you hope), and yet you have to figure out how much this event will cost so you can save up for it now. And if you forget to account for one of the expenses below, you could end up shorting yourself on retirement income no matter how carefully you save and plan.
1. Inflation
Inflation can be a retirement-killer. It's the reason why prices for everything go up over time. But consider what that means for your retirement: If you save enough to cover today's expenses, but prices go up by 10%, 20%, or more by the time you retire, then then your income will fall seriously short of your needs.
Let's say you're aiming to save up $1 million by the time you retire 20 years from now. That's a pretty worthy goal, and it may be enough to see you through retirement when combined with Social Security benefits. However, inflation in the U.S. has averaged 3% per year over the long term, so let's assume prices will rise by 3% for the next 20 years. By the time you retire, that $1 million will be roughly equivalent to $540,000 in today's dollars. In other words, the buying power of your nest egg will be cut nearly in half.
If retirement is still a long way off, you can use that 3%-per-year figure to estimate how much your expenses will change. If retirement is less than 10 years away, then you can safely assume a slightly lower rate of inflation, given that inflation hasn't crested 3% in 10 years.
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Taxes
Income taxes don't go away when you stop working. But once you no longer have an employer, there's no one helpfully taking the tax money out of your paycheck and passing on to the government for you. Whatever income you expect to receive from Social Security, retirement savings accounts, and other sources, you need to budget for the taxes you'll be paying on it. Distributions from tax-deferred retirement accounts such as IRAs and 401(k)s are taxed as income, so a large distribution can trigger an enormous tax bill. For example, in 2017, if you draw $50,000 from a traditional IRA, you'll have to pay $8,239 on that income -- plus taxes on your Social Security benefits.
Don't forget that many states charge income taxes as well. If you own a house, property taxes can be a significant expense that you'll need to budget for. And although selling assets within a retirement account such as a 401(k) or IRA won't generate capital-gains taxes, selling them outside of a tax-advantaged account will.
Long-term care
As we age, certain day-to-day activities become more of a challenge. When your health deteriorates to the point that basic activities such as bathing, dressing, and feeding yourself are too difficult to manage, you need long-term care to help you with such activities. About 70% of the population will need some form of long-term care, yet few retirees budget for this service. And unfortunately, Medicare doesn't cover most long-term care services, considering them to be nonmedical expenses. The easiest way to cope with such expenses is to buy long-term care insurance, though you can also self-insure by saving enough to cover such expenses yourself. However, be aware that long-term care isn't cheap: One year in a private room at a nursing home costs on average nearly $100,000.
Medical
Many people are under the impression that Medicare will cover all medical-related expenses once they hit age 65. Unfortunately, the truth is a lot more complicated than that. Original Medicare (meaning Medicare Part A and Part B) will cover a lot of services, but definitely not all of them. For example, Medicare is no help with medical devices such as hearing aids or wheelchairs, and it won't cover any dental, vision or prescription expenses.
A Medigap or Medicare Advantage plan can help, but even the best insurance policy won't cover every possible expense -- and the more coverage a health insurance plan offers, the more expensive it's likely to be. All in all, it's important to budget for increasing medical expenses as you age. And if you have pets, don't forget to budget for them, too. Just like humans, pets tend to run up higher and higher medical bills as they age.
The unexpected
You can research and plan and try to save up for every imaginable expense, but inevitably, something will come up that you never thought of, and it will probably be an expensive something. That's why it's just as important for retirees to have an emergency savings account as it is for workers. In fact, it may be even more critical for retirees, as most of them are on a fixed income that leaves them with little room for error. An emergency savings account with a few months' worth of expenses in it can turn that unexpected expense from a financial catastrophe into a minor headache. And once it's resolved, you can go back to your happy retirement.
