If you've developed a well-researched and comprehensive retirement plan, then good for you (and bonus points if you put it in writing). But before you get too cocky about your well-funded retirement, check to see if your plan has left out any of these common issues. If it has, you could end up with a much smaller retirement income than you expect, as your savings gets gobbled up by these unexpected expenses.
Inflation
Inflation is the sneaky retirement-killer. It's the reason why a dollar won't buy as much today as it would 20 years ago. Inflation has averaged around 3% per year since the government began tracking it in 1913, although it can vary significantly over the short term. That means you must assume that your retirement savings will lose about 3% of their value every year.
To beat inflation, you need to pick investments that will produce high enough returns to outpace the loss of your money's value. Historically, stocks are the only investment to reliably beat inflation year after year, with large-cap stocks producing an average return of around 10% before inflation over the past century. That's why even retirees need to keep some money in stocks, despite their volatility.
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Taxes
As long as you live, the IRS -- and possibly your state revenue board -- will try to collect a cut of your income. If your retirement plan doesn't account for your future taxes, your entire budget could be thrown out of whack. For example, say you figure out that you'll need $3,000 per month in income from your retirement savings to get by, so you plan to remove $3,000 from your traditional 401(k) or IRA. Your withdrawals will be subject to income tax, so you'll have to pay a hefty tax bill, leaving you with much less than $3,000 a month to work with. And if your taxable income is high enough, your Social Security benefits will be taxed, too -- leaving you even deeper in the hole. So start thinking about how you will minimize the amount of income you fork over to the government.
Of all the retirement tax minimizing tools out there, the Roth-type account is the undeniable king. Having a significant percentage of your retirement savings in a Roth account gives you more control over how much income tax you pay each year, minimizes your required minimum distributions, and allows your investments to grow tax-free for as long as they're in the account.
Estate planning
Failure to do at least minimal estate planning puts an unfair burden on your family. They'll already be upset and stressed by your passing; they shouldn't also have to deal with a mountain of legal and financial issues owing to your lack of planning. Skipping the basics of estate planning could also cause your beneficiaries to shell out a lot more money. For example, if you don't have a will, in most states the court will assign an administrator to distribute your assets according to state law, and the administrator's fees (and possibly other legal fees) will come out of your estate.
The essentials of estate planning include writing a will, naming beneficiaries for all your accounts (and keeping them up to date), and setting up a power of attorney in case you become incapacitated. You may also consider filling out an advance medical directive to dictate which extreme lifesaving measures you want doctors to undertake if you're incapacitated, as well as setting up trusts to manage issues such as probate and estate taxes.
Long-term care
The odds that you'll need long-term care at some point in your lifetime are considerably better than even, and that care doesn't come cheap: The average cost of long-term care for a couple is around $130,000. That being the case, building long-term care expenses into your retirement planning is a must. You can't count on Medicare to help with these expenses; it won't cover long-term care expenses unless there's a clear medical necessity, e.g., if a doctor orders a nursing home stay for you -- and even then, Medicare only covers the first 100 days.
Long-term care insurance can protect yourself from such expenses, and it's best acquired while you're relatively young and in good health, which will keep your premiums as low as possible. Most people can get the best deal by purchasing long-term care insurance in their 50s. One often-overlooked benefit of long-term care insurance is that while long-term care expenses themselves are difficult to predict, the insurance premium is predictable and thus much easier to budget for.
If you wait until you're retired to build these expenses into your budget, you'll probably have to make some sacrifices in order to squeeze them in. Luckily, it's never too late to revise your plan. Consider seeing a financial advisor or other expert to help you deal with these issues. For example, someone with extensive tax knowledge may be able to come up with ideas you'd never think of for reducing your tax burden.
