4 Retirement Costs That Could Blindside Even the Best-Prepared Savers

Being financially prepared for retirement involves more than just saving money. You need to plan for the unexpected and ensure you’re in a good financial position to support yourself for decades, during which time unexpected costs are inevitable. Unfortunately, even the most prepared savers often overlook some big potential expenses.

Here are a few things to make sure you’re saving for if you want to maximize the chances of having the security you deserve as a retiree.

Image source: Getty Images.

1. Long-term care costs

Many retirees don’t prepare for the biggest expense of their retirement because it’s a cost they don’t want to think about: nursing home or long-term care.

While most people want to age in place, the reality is that not everyone can, at least not without help. An estimated 7 out of every 10 people will need long-term care during their lifetime. And the average costs of a private room in a nursing home total $10,798, while the average costs of in-home care by a non-medical caregiver are $6,673.

Medicare covers none of this routine care if you just need help with activities of daily living, so you must be prepared for this huge expense. This could take the form of buying long-term care coverage, engaging in Medicaid planning with an estate planning lawyer, or saving a substantial sum in your retirement plans in case you need care.

2. Medicare premiums and out-of-pocket health expenses

Medicare premiums and out-of-pocket healthcare costs are another thing many people overlook in their retirement planning. When you’re preparing for retirement, you may assume that most or all of your costs will be covered by either a Medicare or Medicare Advantage plan.

That’s not even close to true. With premiums, co-pays, co-insurance costs, and services that aren’t covered, a 65-year-old retiring today can expect to spend $172,500 on average on healthcare costs in retirement, according to Fidelity.

If you’re not prepared for these expenses, you’re going to have a problem. Investing in a health savings account is one option if you have a high-deductible plan that qualifies you to take advantage of the generous tax breaks this account offers. You can also put more money into your 401(k) or IRA that you specifically plan to spend on covering your medical costs as a retiree.

3. Taxes

Taxes are another thing that may not be on your radar but should be. You’ll typically owe taxes at your ordinary rate on distributions from traditional retirement plans. If your income crosses the thresholds, which are lower than you might expect, you will also owe taxes on Social Security. This catches many people off guard because they don’t expect these benefits to be taxable.

Benefits become partly taxable once your provisional income exceeds $25,000 for married filers or $32,000 for single tax filers, with provisional income equal to half of all Social Security, plus all taxable and nontaxable income. Since the thresholds aren’t indexed to inflation, more people get hit with these taxes each year.

You need to plan for the taxes you’ll owe on your retirement income, as they will reduce the amount you can spend on your living expenses.

Tax rates are currently very low by historical standards, and with mounting government debt combined with financial problems that threaten the long-term financial stability of Social Security, there’s a very good chance taxes will increase before today’s workers become tomorrow’s retirees.

4. Inflation

Finally, inflation is a hidden cost that every retiree needs to plan for. While the Federal Reserve’s target inflation rate is 2%, inflation has been considerably higher in recent years. Prolonged inflation can reduce the buying power of much of the income retirees have.

In fact, even Social Security benefits don’t fully keep up with inflation, even though Social Security cost-of-living adjustments (COLAs) are supposed to prevent seniors from losing ground. The Senior Citizens League estimates benefits have lost buying power, and not a small amount either — benefits have lost an estimated 13.7% of their real value since 2010 because the formula used to calculate COLAs is imperfect.

Retirement savers need to plan and prepare for this so they aren’t caught off guard by unexpected costs and left facing financial hardships when their savings don’t go as far as they’d planned.