Saving enough for retirement is a major challenge for a lot of people, but it's not the only difficult part of the retirement planning process. You also have to anticipate what your costs will look like decades from now, and it's easy to underestimate or forget about some expenses altogether.
You probably already know to budget for housing and food. But you can't forget about the following three costs either.
1. Healthcare
Most seniors will have Medicare to help them cover some of their healthcare costs in retirement, but they'll still have to pay plenty out of pocket. Medicare has its own deductibles, copays, and premiums. And there are some things it doesn't cover at all.
If you need hearing aids, dental care, or long-term care, you'll probably want some type of supplemental insurance. You'll also need to add a Part D plan unless you plan to pay for your prescriptions entirely out of pocket.
It's tough to anticipate how often you'll need to seek medical treatment in retirement, but generally, people need more medical care as they age. So having the right insurance coverage is key if you're worried about draining your savings too quickly.
Shopping around during the annual Medicare open enrollment period once you're eligible can help you find the coverage you need at an affordable rate. If you plan to purchase supplemental coverage, like a separate dental or vision care policy, be sure to include extra money in your retirement budget to cover that.
2. Taxes
It's pretty difficult to avoid taxes entirely in retirement. Most people wind up with at least some tax-deferred retirement savings, and the government expects a cut of them when you withdraw your funds. If you're working in retirement, you'll also have to continue paying income taxes on that money. And you could even owe taxes on your Social Security benefits, depending on your annual income and tax-filing status.
How much you owe depends on how much you spend annually, where that money comes from, and your tax-filing status. You can use your current tax bracket as a baseline, but you also have to think about how your expenses will change between now and retirement. Those who expect their incomes to rise may have to pay more in taxes than they're used to, while those who think their income will fall significantly might pay less.
You can reduce how much you owe in taxes by keeping some of your retirement savings in Roth accounts. You pay taxes on your contributions to these accounts in the year you make them, so you usually don't owe anything on your withdrawals in retirement. But unless all your retirement funds are in Roth accounts, you'll still need to budget some money for taxes so you avoid trouble with the IRS.
3. Emergencies
Emergency expenses can crop up at any age, and they add up quickly. A single appliance failure or insurance claim could easily cost you thousands of dollars.
You may be able to reduce the likelihood of some emergencies with careful planning. For example, if you know your roof or appliances will need replacing during your retirement, you can budget for those things in advance. But there will always be things you don't see coming.
It's not a bad idea to build a cushion into your retirement savings to handle unexpected expenses if you're able to do so. Otherwise, when an emergency arises, you may have to cut back spending in other areas in order to stay on top of all your bills.
Do you need to revisit the drawing board?
Don't panic if you forgot to include any of the above expenses in your retirement plan. There's still time to fix it. But you may need to make some changes to your current retirement savings strategy.
If you're able to, try to increase your contributions going forward to provide you with the extra money you'll need to pay for the costs mentioned here. If that's not possible, you might have to delay retirement a little longer to give yourself additional time to save.
Explore a few options until you find a solution that works for you. And don't forget to review your retirement plan annually or whenever you experience a major life or financial change to ensure you stay on track for your long-term goals.