Even as you contribute to a retirement plan and consider your ideal retirement, it's easy to overlook the details. This is where focusing on the budgeting mistakes current retirees have made can come in handy. Once you get an idea of things today's retirees wish they'd known before they clocked out for the last time, you can incorporate them into your plans.
Here are some of the post-retirement expenses that have caught many off guard.
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1. Failing to change the way you spend
It's fair to assume that some retirees save so diligently for retirement that they can easily maintain their pre-retirement budget. If that doesn't describe your situation, failing to change how you spend once you retire can quickly drain your savings and investment accounts.
While saving and investing for retirement is essential, designing a plan for how you'll spend that money is equally important. Without a plan, you're just hoping for the best.
Whether you're years away from retirement or it's so close you can practically touch it, create a plan that fits the income you'll receive after you retire. A retirement or financial advisor can help you develop a plan that ensures you won't outlive your retirement savings.
2. Continuing to invest like you're 30
Oh, to be young and able to invest like a daredevil. When you were young, you could invest more aggressively because your portfolio had plenty of time to recover if things went south. However, when you're in retirement (or nearing retirement), you may want to consider adjusting your approach.
Investments like bonds may be less exciting than stocks from the latest hot company, but they're also more likely to preserve your capital.
3. Rolling your eyes at another healthcare cost warning
If the idea of hearing one more person warn you about expensive healthcare costs in retirement makes you want to scream, you're probably not alone. It seems that healthcare costs in retirement are all some people want to talk about.
They're not wrong. In 2002, Fidelity Investments projected that health-related expenses in retirement would cost the average retiree around $80,000. Today, Fidelity says that a 65-year-old retiring this year can expect to spend an average of $172,500 on healthcare and medical expenses.
It's a lot of money, and failing to consider it as you plan for retirement may mean having to cut another area of your budget.
4. Underestimating the effect of taxes
Depending on your income sources during retirement, you may find yourself paying taxes on Social Security benefits. If Social Security is your sole source of retirement income, you are unlikely to owe taxes on it. However, if you're also receiving retirement income from other sources, you should plan to pay taxes on your benefits.
In addition, if you live in Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Vermont, Utah, or West Virginia, you may also face state taxes on your benefits.
5. Missing (or miscalculating) required minimum distributions
Once you reach a certain age, you must begin taking annual distributions, known as required minimum distributions (RMDs), from specific retirement accounts.
One of the silliest mistakes to make in retirement is to miss an RMD or miscalculate how much you're required to withdraw. Failure to withdraw your full RMD by the due date could leave you with a penalty of 25% of the amount that was supposed to be withdrawn. Let's say you forget to withdraw $20,000. Your penalty could be as much as $5,000. If you correct the error within two years, the IRS says that the penalty will be reduced to 10%.
If you hold any of the following retirement accounts, plan on taking your first RMD the year you turn 73 (or 75, if you were born in 1960 or later):
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- 401(k) plan
- 403(b) plan
- 457(b) plan
- Employer-sponsored profit-sharing plan
- Inherited retirement accounts (even those that are otherwise RMD-exempt, like Roth IRAs or Roth 401(k)s)
Knowing which budgeting mistakes have caught other retirees off guard can help you plan for those expenses so they don't surprise you in the least.
