It's much better to plan for retirement than to up and quit your job without having done any calculations or made any important decisions ahead of time, like where you'll live, what you'll spend, and how you'll occupy your newfound free time. But in the course of your retirement planning, you may neglect a few key factors that could really mess with your finances and goals. Here are three to keep on your radar.
Many seniors are surprised to see what their tax liability looks like during retirement. Now you may be aware that if you're saving for retirement in a traditional IRA or 401(k) plan, as opposed to a Roth, your withdrawals will be taxable. But that's not the only income source the IRS may want a piece of.
Plus, you may be taxed on your pension (if you're eligible for one) and other important sources of income, so it's important to read up on taxes ahead of retirement. Better yet, consider consulting with a tax professional who may be able to offer tips on how to lower that burden once your career comes to an end.
2. Social Security cuts
As is it, Social Security will not replace your pre-retirement paycheck in full. If you're an average wage-earner, you can expect your benefits to cover about 40% of your former earnings. And since most seniors need roughly twice that sum to live comfortably, that's something it's important to be aware of.
But if benefit cuts come into play, Social Security will end up providing even less replacement income for you. And those cuts are, as of now, a distinct possibility. In fact, the program may be forced to implement them as early as 2034, because that's when Social Security's cash reserves (known as its trust funds) are expected to run dry.
A good way to compensate for lower Social Security benefits is to ramp up your IRA or 401(k) contributions. In fact, that's a good thing to do even if lawmakers come up with a fix to prevent benefit cuts down the line, since, as mentioned, relying too heavily on Social Security could result in a financial crunch.
3. Rising healthcare expenses
It's no secret that living costs have a tendency to increase over time. But healthcare, which is a huge expense for seniors in particular, has been rising at an even faster pace than other costs. In fact, Fidelity estimates that the typical 65-year-old opposite-gender couple retiring today will spend $300,000 on healthcare throughout retirement.
To avoid financial issues during your senior years, make sure to plan for higher healthcare costs ahead of time. Pad your IRA or 401(k), and if you're eligible to fund a health savings account, do it.
Participation in one of these plans hinges on being enrolled in a high-deductible health insurance plan, which may not be an option for you. But if it is, you have a prime opportunity to save for future medical costs in a tax-advantaged fashion.
The last thing you want to do is enter retirement and fall victim to a series of nasty financial shocks. Now that you've been made aware that taxes, Social Security cuts, and rising healthcare costs could mess with your retirement budget, you can take steps to avoid a financial crisis during your senior years.