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Myths of Retirement Spending
November 3, 2014 | Heather Boerner; excerpted from Thrivent magazine
Medical expenses, living expenses & taxes might cost more
Do your ideas about retirement spending line up with reality? You may need more money than you think you will.
Imagine your retirement: the travel, the visits with the grandkids, the volunteer work and artistic pursuits you always put off, thinking, "When I have free time ..."
Now, imagine the budget it takes to support that life. When it comes to retirement, the costs can be far different from what you expect. That's not a failure of imagination – but it can be a failure of planning.
"People think they're going to spend less when they retire, but they actually might spend more, for many years," says Katrina Kaschinske, a Thrivent Financial representative in Frankenmuth, Michigan. "Between the cost of living not dropping much in retirement, to unexpected expenses for health care and higher taxes on retirement withdrawals, people really underestimate how much it will cost to have a comfortable retirement."
Here, then, are some of the ways that reality might not match all your plans:
- Living expenses: While spending for most people does drop in retirement, for some, costs actually rise. According to a March 2013 study by the Employee Benefit Research Institute, while only 11% of workers expect their spending to rise in retirement, nearly five times that amount of retirees – 52% – actually experienced the same or higher costs in retirement. In part, this is because, while some of your work expenses go away, others crop up, like the hobbies and travel you've wanted to do for years.
- Medical costs: Most retirees rely on Medicare – but did you know Medicare has co-pays and deductibles, too? If you're served through a Medicare supplement or Medicare Advantage plan, you'll also have a premium. Then there's Medicare Part B, which covers things like medical equipment and some prescription drugs, which also has a premium. The Employee Benefits Research Institute estimates that a married couple who retired at 65 in 2010 would need $376,000 over the course of the rest of their lives to pay for all the things that Medicare doesn't cover.
- Taxes: Here's a shocker: In retirement, taxes sometimes don't go down – they go up. If you've paid off your mortgage, you're no longer getting the mortgage-interest deduction. If you're widowed in retirement, you might have to file at a higher rate than you did as part of a couple. "You have to plan for taxation in retirement, too," says Samuel Capps, a Thrivent Financial representative in Seattle, Washington.
What can you do to plan ahead for these retirement expenses? A Thrivent Financial representative can work with you to outline your goals and develop a realistic prediction of what you'll need to turn your dreams into reality.
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