Retirement is supposed to be an enjoyable period of life, but if you don't plan it properly, the opposite might end up holding true. Here are four mistakes that could derail your retirement and leave you cash-strapped and miserable at the same time.
1. Social Security Alone
Though Social Security helps millions of seniors stay afloat financially, those benefits aren't designed to sustain retirees by themselves. If you are an average earner, you can generally expect to receive about 40% of your previous income in retirement. Most seniors, however, need roughly double that amount to live comfortably, which means that if you don't look for your golden years, you're likely to come up short.
Remember, though certain expenses, like commuting costs, might go away in retirement, most of your monthly bills will likely stay the same. Some might even go up. Take leisure, for instance. You can start spending more time keeping yourself occupied. Similarly, if you are home a lot during the day since you no longer have an office to go to, you might spend more to heat and cool your living space. Be sure to have some personal savings before kicking off your retirement, because relying on social security alone will leave you scrambling to make ends.
2. Underestimating your healthcare costs
Many seniors know that healthcare is a major expense they need to have a grapple with in retirement, but a large number have to realize just how costly medical care can be. Investment giant Fidelity recently shared projects that cost more than $ 285,000 for retirement this year.
Of course, your healthcare tab will depend on numerous factors, such as whether you enroll in traditional Medicare versus Medicare Advantage, whether or not you buy supplemental insurance, and what your actual health looks like. But know this: Fidelity's projections are just one of many estimates out there. HealthView Services, cost-effective software provider, reports that healthcare in retirement will actually cost the average healthy 65-year-old couple today more than $ 364,000. So, keep tracking the cost of medical care, but just as importantly, ramp up your savings so that you have the money to pay for it.
3. Forgetting about taxes
Many people assume that seniors get out of paying taxes, but that's far from true. There are number of ways in which the IRS might come after your income in retirement. First, if you save your savings in a traditional IRA or 401 (k), your withdrawals in retirement will be taxed as ordinary income. The only way to get around this is to save in a Roth IRA or 401 (k) instead.
Additionally, your Social Security benefits might be taxed at the federal level if they only make up a portion of your total retirement income. And if you live in a state that taxes Social Security, you will lose some of the money at the state level as well.
Income you pay from a pension is also subject to taxes most of the time (though there are some exceptions to this rule). And if you earn investment income or interest in a nontax-advantaged account (such as a traditional brokerage or savings account), you'll pay taxes on that, too. The point, therefore, is to plan on forking over some money to the IRS year after year. If you anticipate being taxed in retirement, you can budget around it
4. Not planning for long-term care
Many seniors get injured or experience a decrease in mobility as they age. So many find that they can no longer manage to live on their own without any sort of help. In fact, an estimated 70% of seniors 65 and older wind up need long-term care, whether in the form of a home health aide, or an assisted living facility, or a nursing home. And if you do not buy insurance cover the costs involved, you could be in for quite a financial shock.
The average assisted-living facility in the country costs $ 48,000 a year, according to Genworth Financial's 2018 Cost of Care Survey. Nursing home care is just as expensive – $ 89,297 a year, on average, for a shared room, and $ 100,375 a year, on average, for a private one.
That's why you really need long-term care insurance going into retirement . The best time to apply is in your mid-to-late 50s, because at that point, you're more likely to be discounted on your premium based on your health and age. That said, many seniors apply for policies in their 60s, and if your health is decent, it certainly pays to do so. Otherwise, an extended period of care could effectively wipe out your retirement savings, leaving you broke and vulnerable later in life.
Retirement can be a scary prospect from a financial perspective, but it doesn't have to be. Steer clear of these mistakes, and you'll avoid much of the stress so many of today's seniors face.