When you think about retiring, you probably imagine all of the fun stuff you'll get to spend money on, like gardening or traveling the world. But you also must make sure you have the funds to cover the necessities and pay all of the practical expenses you'll incur.
Unfortunately, many people end up underestimating or simply failing to consider a few of the big expenses they could be responsible for paying. Here are three of them that you can't overlook and must be prepared to cover.
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1. Taxes on Social Security
It may come as a surprise, but there's a very real chance you could owe taxes on your Social Security benefits. This could happen depending on your income and where you live.
See, on the federal level, you're taxed on part of your benefits once your income exceeds $25,000 for single tax filers or $32,000 for married joint filers. At this income level, up to 50% of your benefits could be taxed. Once your income exceeds $34,000 as a single filer or $44,000 as a married joint filer, you're taxed on up to 85% of benefits.
These calculations are done based on provisional income, which isn't all income. It's half of all your Social Security benefits, some non-taxable income like MUNI bond interest, and all of your taxable income. But despite the fact that not all income counts, a growing number of retirees each year end up being taxed on benefits. That's because the thresholds at which the tax kicks in are not indexed to inflation so they don't go up even as benefits rise to keep pace with rising prices.
If you will be subject to federal tax on Social Security, you must plan for this expense to be sure it fits within your retirement budget. Likewise, if you live in one of the 10 states that taxes Social Security benefits and you'll owe tax under the rules where you live, you must plan for these state taxes as well.
2. Healthcare costs
According to recent data from Employee Benefit Research Institute, retired couples turning 65 now may need as much as $413,000 to cover out-of-pocket healthcare costs in retirement.
This is the amount that a retired couple is likely to need if they have high prescription drug needs and want a 90% chance of being able to afford all their medication and other healthcare costs throughout retirement.
If you don't have a plan to cover these costs, that's inevitably going to lead to financial disaster since you probably won't have an extra $413,000 sitting around. Ideally, you can put money into a health savings account (HSA) throughout your working life if you're eligible for one. But even if you aren't, it's important to have dedicated retirement savings set aside specifically for your medical needs.
3. Long-term care expenses
Finally, it's a good idea to have a plan for how you'll handle the costs if you need long-term care. As many as 70% of adults who survive to the age of 65 end up needing some type of long-term care at some point during the rest of their lifetimes. And this care typically comes at a huge cost that Medicare won't cover.
There are options available, like buying long-term care insurance or working with an estate planning attorney to make a plan to shield your assets while qualifying for means-tested Medicaid to pay for your nursing home or home care services. But you often have to make these plans well in advance of the time you need care.
Ultimately, if you aren't prepared for these expenses, you could have a very tough time affording them as a retiree. So, start working on a plan for them now before it's too late.
