You’ve spent a good portion of your life working and saving to pad your retirement fund. Once you reach that milestone, you want to feel confident that your nest egg filled with 401(k) contributions, traditional IRA lump sum distributions and Social Security benefits is big enough to cover your needs in your golden years.
As you approach retirement age, it’s important to analyze your investment strategy and anticipate some of the costs that could eat into your savings. Here are seven expenses that can drain your retirement savings — and how to plan for them.
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Even with Medicare, out-of-pocket healthcare expenses can be significant. According to Taylor Kovar, certified financial planner and CEO at The Money Couple and Kovar Wealth Management, “This includes prescriptions, surgeries and long-term care costs.”
Many financial experts estimate that you will need at least $1 million saved to retire comfortably, and with seniors paying hundreds of thousands of dollars on medical bills, this shortens how long even exorbitant funds will last.
How To Plan: Kovar said it’s a good idea to have a health savings account (HSA) or a similar fund specifically for medical expenses. “Regularly reviewing your health insurance and considering supplemental insurance can also help mitigate these costs,” he added.
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If you own a home, that can be another source of major expenses that eat into retirement funds. “As homes age, significant repairs like roof replacements or plumbing issues become more frequent,” Kovar said. This holds true especially if you’ve lived in your house for many years as that tends to lead to expensive repairs and upkeep for older features.
How To Plan: Kovar recommends setting aside a home maintenance fund and conducting regular home inspections to help anticipate and spread out these costs.
Inflation can significantly impact your future savings, since you’ll need to take larger withdrawals to make up for the higher cost of living. According to Jeff Busch, partner and investment advisor representative at Lift Financial, “This can be particularly troublesome if your portfolio is made up of fixed income strategies that can’t keep up with inflation by increasing income over time.”
How To Plan: To mitigate inflation, Busch said you may want to invest a portion of your portfolio in stocks that have historically provided better returns than bonds and cash. In general, he added, maintaining a diversified portfolio can be a big help in the long run.
From student loans to cell phone bills, many retirees find themselves financially assisting their adult children or even their grandchildren. Unfortunately this is the opposite of creating generational wealth and can lead to not just depleted retirement accounts, but also debt in your fixed-income years.
How To Plan: Kovar said it’s essential to set boundaries and have open financial discussions with family to ensure this support doesn’t derail retirement plans.
Once you start taking money out of your retirement accounts, you pay on that taxable income and on the distributions (in most cases). You may also have to pay taxes on a portion of your Social Security benefits. As many retirees live on a fixed income, Busch said high taxes immediately lower take-home income. That’s why tax planning is key for retirees.
How To Plan: Busch said one way to help offset taxes in retirement is to convert your retirement accounts to tax-free accounts by using a Roth IRA conversion. “This strategy converts your taxable retirement accounts to tax-free withdrawals in the future,” he explained. “If you are still in the accumulation phase of planning, then you may want to consider making your retirement savings contributions to a tax-free investment such as a Roth IRA or Roth 401(k).” It can also be a good idea to speak with a professional to optimize your tax strategy.
At age 65, your retirement savings goals go into full action mode, so it may be a good idea to put some of your money in higher-risk market securities. While this results in larger returns, short-term market downturns significantly impact your retirement savings, “especially if they occur shortly before or during retirement,” Busch said.
How To Plan: If you are in retirement or very close to it, Busch suggested setting aside at least three years’ worth of income in an account with low volatility that can produce stable results. This gives the remaining assets in your portfolio time to recover through down markets and keep you from having to liquidate assets at a loss to provide income. “Rebalancing your portfolio as needed will also help to keep your assets in line with your income needs, as well as manage market risk.”
For better or worse, people live much longer these days than they used to thanks to advances in healthcare and technology. While that might mean you get to spend more time enjoying your golden years, it also means you will have greater overall lifetime expenses. “With many people living into their 90s or even 100s, it’s crucial to plan for a longer retirement than you might expect,” said Kovar.
How To Plan: To combat the increased cost of living due to longevity, Kovar recommends that retirees do the following:
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Always have a rainy-day fund.
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Periodically review and adjust your financial plans to account for life changes.
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Consider long-term care insurance and other policies that can offset significant unexpected costs.
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Continuously educate yourself about financial trends, especially those related to retirement.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 7 Expenses That Drain Your Retirement Savings the Quickest
