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3 Retirement Surprises to Get Ahead Of

By Catherine Brock – Aug 17, 2021 at 6:45AM

Key Points

  • A couple retiring this year should expect to spend $300,000 in healthcare costs throughout retirement.
  • 401(k) and IRA distributions, investment and interest earnings in taxable accounts, annuities, pensions, and, often, Social Security are taxable for retirees.
  • Inflation works constantly to devalue your wealth.

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Don't let these mishaps wreck your retirement.

Retirement is supposed to be about carefree days, fun with friends, and hobbies that make you smile. You can easily get distracted from that relaxed lifestyle, though, if financial stress sets in. Fortunately, you can address common financial setbacks in retirement well before you retire.

Here are three retirement surprises others have faced before you, and how to get ahead of them.

1. Budget-busting healthcare costs

A recent report from financial company Fidelity estimated that an opposite-gender couple retiring in 2021 could spend $300,000 on healthcare costs throughout retirement. A single woman retiree could spend $157,000 in total, while a single man retiree should expect total healthcare expenses of $143,000. The report also notes that the total healthcare cost estimate has increased 10% since 2011.

Senior couple walking on the beach with their arms around each other.

Image source: Getty Images.

The takeaway is that you might spend a sizable piece of your hard-earned retirement savings just on healthcare costs. If you don't plan for that, your budget in retirement could be uncomfortably tight.

The solution is to save more, preferably in a Health Savings Account (HSA). HSAs lower your healthcare costs by allowing you to pay for them with pre-tax funds. Your qualified HSA contributions are tax-deductible and withdrawals for healthcare expenses, at any age, are tax-free.

After your 65th birthday, you can take taxable withdrawals from an HSA for non-medical reasons.

2. Income taxes that won't quit

You can quit your job, but there's no retiring from income taxes. Most sources of retirement income are taxable at the federal level. That includes your 401(k) and individual retirement account (IRA) distributions, investment and interest earnings in taxable accounts, annuities, pensions, and, often, Social Security.

To manage your taxable income in retirement proactively, start building sources of non-taxable income. The more you can tap tax-free sources to cover your living expenses in retirement, the more you can influence your annual tax bill.

Most people rely on Roth IRA or Roth 401(k) distributions for this, but tax-free bonds and life insurance loans or withdrawals could also help. If your 401(k) allows for designated Roth contributions, start making them today. You can also contribute to a Roth IRA, as long as you meet the income requirements.

If you can't fund a Roth 401(k) or a Roth IRA, explore the possibility of converting your traditional IRA funds to a Roth. You'll pay taxes on the conversion, but then your future withdrawals from the Roth will be tax-free.

3. Wealth-sapping inflation

Inflation is constantly working to devalue your wealth. Many of us don't notice inflation while we're working because our annual pay raises cover it. But once you retire, the ongoing squeeze of inflation becomes obvious. Your expenses will rise over time and you'll have to adjust your budget accordingly.

Social Security does have cost-of-living adjustments (COLAs), but they're widely criticized for being insufficient. The argument is that seniors have unique spending habits -- including a heavy healthcare expense burden -- and COLAs don't account for that.

Regardless of your stance on Social Security COLAs, it's smart to hedge against inflation to protect your savings. You can do this by investing in:

  1. Dividend-paying stocks and funds. Stocks in general tend to grow faster than inflation. Dividend stocks have the added advantage of generating cash so you're less reliant on selling shares. Choose stocks and funds with a record of regularly increasing their shareholder payouts.
  2. TIPS, or Treasury Inflation-Protected Securities. TIPS are government bonds that are indexed to inflation as measured by the Consumer Price Index.
  3. Real estate. Property values rise with inflation. The drawback of real estate is that it's illiquid and cumbersome to sell. A real estate exchange-traded fund (ETF) is a more convenient alternative to owning real property.
  4. Commodities. Commodities like grain, precious metals, and oil can also track with inflation. They can be volatile, though, so look for a diversified ETF and keep your exposure here small.

Surprises are for parties

Generally, you only want to hear, "surprise!" from your friends -- not from your healthcare provider, the IRS, or your bank. Now's the time to get ahead of healthcare expenses, income taxes, and inflation before they undercut your budget in retirement.

Put in the effort today and you'll free up time and mental energy later for important stuff, like relaxing and enjoying your carefree days.

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