What Are Hidden Retirement Costs?

Whether you’re five weeks away from retirement or 50 years removed from getting your golden watch, you want to be completely prepared when you clock out for the final time. While you diligently plan, save and invest to be ready, hidden costs may lurk under your pristine retirement budget.

At Community Point Bank, we want to help our customers and community tackle their financial goals, including saving for retirement. Stick with us to learn more about hidden retirement costs and what you can do to be prepared.

What Is a Hidden Retirement Cost?

Retirement planning can feel like a guessing game when it comes to determining how much you need to save. One survey on individuals with 401(k) retirement plans found that the average estimated amount they felt was needed to retire was $1.7 million. That might seem like a lofty goal, but most agree it would provide for a comfortable living.

However, even with a solid nest egg, making sure you are prepared for unforeseen costs is crucial. So, what are hidden retirement costs? Hidden retirement costs are any costs you do not account for or plan for when building your retirement plan.

While you want to prepare for all of the fun things you will do and accomplish in retirement, like traveling the world, getting a new hobby or buying your dream car, other expenses aren’t as fun to plan for. Here are a few retirement costs that you may not think about.

Four Common Hidden Retirement Costs and How to Address Them

Hidden Retirement Cost #1: Health Insurance Premiums and Gaps

Most retirees use Medicare to cover healthcare expenses, as it is government-provided health insurance for individuals 65 and older. While it’s nice to know that you have some security in Medicare after retirement, the premiums, deductibles and gaps in coverage can quickly throw off your plan.

One report found that a significant portion of retiree’s savings and Social Security benefits went toward covering their medical expenses, with the median coming in at around 25% of the retirees’ income. A survey on rising health costs estimated that an individual will need about $157,000 saved for retirement healthcare expenses.

So, what can you do to prepare for hidden retirement healthcare costs? Here are two quick steps you can take.

  • Get up to speed on your potential out-of-pocket costs. While Medicare deductibles and premiums will change over time, checking costs when speaking with a financial advisor or managing your retirement plan is a great way to estimate how much you must set aside each year. This way, you can see how much you need in a personal or health savings account.
  • Maximize a health savings account (HSA). If your current health insurance provider offers an HSA, you may be able to contribute pre-tax and withdraw it later to cover medical costs not covered by Medicare.

Hidden Retirement Cost #2: Long-term Care

Outside of healthcare, the next significant expense in retirement that may catch you off guard is long-term care. It isn’t fun to think about relying on others to help you as you age. However, know you won’t be alone in this. Approximately 70% of individuals 65 and older in the United States will need long-term care in retirement. Medicare will cover some necessary services if you are hospitalized after an injury or illness, but it won’t sustain costs for help with everyday activities.

Having a plan to address long-term care costs can help you and your family immensely.

  • Plan out costs to self-fund nursing home or in-home caregiving expenses in your retirement strategy. Saving to self-fund your long-term care can give you the most flexibility and options for care.
  • Utilize a long-term care insurance plan. Long-term care insurance works like other term insurance policies: you pay your premium until the term expires. You won’t get the benefits if you don’t use the insurance during the period. There are risks and benefits to paying for this type of insurance, so it’s essential to assess your financial situation and decide if you can afford the premiums or have enough assets to cover long-term care costs.

#3. Taxes on Retirement Income

You may have to pay taxes on your withdrawals depending on your retirement savings method. With some plans, like a Roth IRA, you pay your taxes upfront and don’t have to worry about your income being taxed. If you choose a traditional plan or other investment vehicle that isn’t tax-advantaged, you can expect to pay taxes on your withdrawals. A few ways you can make sure unexpected taxes don’t sneak up on you are:

  • See if you can convert your traditional plans into Roth plans. In some cases, you can move your retirement savings from a traditional plan to a Roth plan and pay taxes on the amount after moving it. This allows you to pay taxes on the amount while you still have an income and can budget for the expense.
  • Discuss your tax costs with a certified tax specialist. If you need to keep your retirement savings in a traditional account, talk with a tax expert to get a better understanding of how much you will pay. Budgeting for tax deductions will help you paint a clearer picture of your usable income in retirement.

#4. Financial Emergencies

Unfortunately, retirement doesn’t grant immunity from appliances that break, cars that need to be fixed and routine house maintenance. These financial emergencies are difficult at any stage of life but can be especially challenging in retirement due to your fixed income. How do you stay ready for the storm?

  • Maintain the same emergency savings amount as your working days. When you have to dip into your emergency savings, make sure to replenish it with your monthly income. Saving is key to financial success regardless of your age, so don’t skimp because you’ve made it to retirement. 

Find the Right Bank to Help You Manage Your Finances

A good bank is critical to helping you make strides in your financial journey and preparing for hidden retirement costs. You want to make sure you work with a financial institution that has the services you need and a friendly, knowledgeable staff you want to work with. The team at Community Point Bank can help you make the most of your banking experience. Get in touch with a team member today to learn more!