Retirement Surprises That Can Cost You


In an ideal world, retiring means you’ll receive a full pension, making you financially stable for the rest of your life. However, it doesn’t always work as you planned. Oftentimes, retirees run into a few unwanted surprises that can turn into major monetary blunders. To avoid these surprises (and a major headache later), take note of these common costly retirement issues you might not have planned for:

In an ideal world, retiring means you’ll receive a full pension, making you financially stable for the rest of your life. However, it doesn’t always work as you planned.The Price of Healthcare

The average 65-year-old couple will spend a whopping $400,000 out-of-pocket until the age of 92 during retirement (not including long-term care costs), according to a study by Fidelity Investments. Many retirees find Medicare to be pricier than they had initially thought. Part A of traditional Medicare may be free (which includes hospital benefits), but you need to pay for Part B for outpatient coverage and Part D for prescription-drug coverage. A private Medigap policy will cover what Medicare doesn’t, but a premium cost is involved. Factor that in and couples could spend more than $6,000 in just premiums. In addition, beneficiaries with a high income are subject to pay a premium surcharge.

Paying for Things you Didn’t Used To

For instance, many times, employees of small businesses had their meals, company car, travel or computers paid for, and when it’s time to shell out the money, it can come as sticker shock to some.

“Small business owners and professionals who retire are often surprised how many of their expenses were picked up by their company,” says Bert Whitehead, president of Cambridge Connection, in Franklin, Michigan. “It is a jolt when they discover how much it adds up to.”

In addition, many people want to travel when they retire, but all those costs can add up.

“Travel budgets tend to be at least 10 percent to 20 percent higher than what had been budgeted,” explains certified financial planner Debra Morrison in New Jersey. Even if traveling is not in the cards, something is with all that free time — be it picking up a new hobby, fixing up the house or spending time with their grandchildren.

“Retirees desire to travel and become more active in the lives of their children and grandchildren,” says certified financial planner Lazetta Rainey Braxton of Financial Fountains in Chicago. “It’s hard to plan for activities and ‘unassigned gifting’ when a retiree has never set aside these ‘line items’ in their budget.”

Social Security Taxes

Most people don’t realize that up to 85 percent of Social Security benefits are taxable.

“Retirees have a difficult time adjusting to the taxability of Social Security income and the low income thresholds. Most retirees don’t see Social Security as taxable deferred income since they paid into the government fund using after-taxed dollars during their employment years. In their minds, retirement income shouldn’t be taxed twice,” according to Braxton. Also, keep in mind that if you’re still working before you’re of retirement age, you have to pay up to $1 in benefits for every $2 you make over the annual earnings limit. Once you pass full retirement age, however, the benefits are adjusted accordingly.

In an ideal world, retiring means you’ll receive a full pension, making you financially stable for the rest of your life. However, it doesn’t always work as you planned.Tax on Retirement Savings

If you take out money that was once deferred of tax from your traditional IRA or 401(k), you are now taxed using your income tax rate. So if you need to withdraw a certain amount, you’ll need to take out more than you initially realized in order to cover the cost. Money may remain in IRAs and 401(k)s until age 70 ½. At that age, you’re required to take minimum withdrawals. And depending how much is in the account, you may be subject to a higher tax bracket than you originally thought.

Income Loss if Your Spouse Dies

As dejecting as it may seem, it’s important that couples plan accordingly. Ensure that if one were to pass away, the other would have enough income to live on.

“One thing people don’t plan for is the reduction of income if a spouse or partner dies — without corresponding reduction in expenses,” says certified financial planner Kathy Hankard, of Fiscal Fitness, Verona, Wisconsin. For instance, if both parties are receiving Social Security, a large portion of that will be lost if one dies. One way to avoid this is to boost the potential survivor benefit using delayed retirement credits. The person in the relationship with the higher income can wait to take their benefit, which can earn up to 8 percent a year in delayed credits up to age 70. That way, if their spouse should pass away, the other can switch to earning 100 percent of the deceased spouse’s benefit.

 

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