While it’s natural to look ahead to a leisurely retirement, it’s prudent to prepare for expenses that catch many retirees by surprise. In a recent survey, nearly one-third of retirees reported they faced at least four unforeseen expenses during retirement. Some of the most common include:
Inflation: Inflation rates have been low since the 2008-2009 recession. But even subtle increases can add up over time. For example, $100 in June 2009 had the same buying power as $119.52 in June 2020. Unless that $100 was invested, it effectively lost 20 percent of its value in just 11 years. And there is no guarantee inflation will remain low. It’s important to invest in assets that can compound through multiple market environments to protect your purchasing power.
Home Expenses: If the value of your home dramatically increases, so will your property taxes. On the flip side, if the value of your house declines dramatically, you may not be able to sell it without a loss. And there are repairs and maintenance to consider. Some financial professionals suggest setting aside 10 percent of your monthly payment, property taxes, and homeowner’s insurance for repairs and maintenance. Paying off your mortgage or downsizing can reduce monthly expenses and allow you to hold on to your home until reduced prices rebound.
Social Security and Other Taxes: If you’re like most recipients, you’ll pay income tax on your Social Security benefits. Individuals with a total gross income (including benefits) of $25,000 may pay taxes on up to 50 percent of their Social Security benefits. Up to 85 percent of benefits are taxable for individuals with a combined gross income of more than $34,000.
As a reminder, distributions from a 401(k) or traditional IRA are taxed at your ordinary income tax rate. Consider withdrawing funds from tax-advantaged vehicles first, such as a Roth IRA, to potentially delay your tax liability.
Retirement is something most of us look forward to. Ensure your plans aren’t derailed by these unexpected expenses and others. Make sure you’re on the right track. Contact our office for a review of your financial situation and an evaluation of your goals.