Retirement is a time when new fears suddenly surface. As we have written in the past, some of these worries can be exaggerated.
However, other anxieties are well-founded. Because retirement is a new mode of living, it can be difficult to manage these challenges if you aren’t prepared for them.
That is why we are here. Learning what to expect can help you plan for potential trouble long before it arrives. Following are some justifiable fears you may experience during retirement — and some tips for overcoming them.
If you are like many Americans, today’s rising prices have you on edge. And for good reason.
Costs are surging in a way not seen in decades. That is bad enough when you have a steady paycheck, but it is an existential threat when you are trying to live on accumulated savings and Social Security checks.
Even though people are worried about rising prices, they might not understand the full danger. If inflation were to average 6%, it would take just a dozen years to cut the spending power of a dollar in half.
Fortunately, there are things you can do to fight back. For more on keeping higher prices from ruining your golden years, check out:
- “Inflation Is Surging: 20 Ways to Fight Higher Prices“
- “5 Ways Retirees Can Lower Their Inflation Risk“
2. Health care costs
We all want to live long, healthy lives. Unfortunately, it doesn’t always work out that way.
Regardless of how well we eat and how much exercise we log, our health is likely to decline with time. About 78% of adults age 55 and older have at least one chronic health condition, and 47% have at least two, according to the Centers for Disease Control and Prevention.
Those medical woes mean higher health care costs.
The inflation spreading throughout the economy is nothing new in health care, where costs have been rising for a long time. As we age and need more medical care, our wallets can end up as sick as the rest of us
Fidelity Investments estimated that the average couple retiring in 2022 might need about $315,000 to cover health care expenses during retirement.
Even if that number sounds a bit exaggerated, health care costs are likely to become an ever-larger part of your budget as your golden years roll on.
One great way to help tame these costs is to build up a healthy balance in a health savings account so you will have a pool of tax-advantaged cash to turn to when medical bills come due.
However, it is best to try that strategy well in advance of retiring. If you already have left work, you will find tips for cutting health costs during retirement in “12 Surprising Ways to Save on Retirement Health Care Costs.”
3. High taxes on RMDs
For decades, Uncle Sam offered you a sweet deal: In exchange for agreeing to divert a portion of your income into retirement plans such as a 401(k) or IRA, the government granted you large tax deferrals.
But eventually, the bill comes due. If you made those contributions to a traditional tax-deferred account, you will finally have to pay taxes on the money when you make withdrawals in retirement.
To make matters worse, the timing of these withdrawals is not completely in your hands. Once you turn 72, the government requires you to begin tapping the funds, even if you don’t need the money.
And once you start withdrawing the cash, tax bills follow.
The size of these taxes can come as a surprise to some retirees. The government uses a formula that calculates required minimum distributions — or RMDs — based on your account balance and anticipated life expectancy. Depending on the size of your retirement fund, that could add thousands or more to your annual taxable income.
While there is legislation before Congress that would push the age for RMDs back to 75, that may may have unintended consequences. With more time for an account to grow and fewer years over which to spread distributions, RMDs can grow larger the longer you wait to start taking them. That means you will owe even more in taxes each year.
Properly managing your retirement account withdrawals — both prior to and after your RMDs begin — is the best way to protect your finances. Converting to a Roth account, which offers tax-free withdrawals, may be another option. For tips on doing so, talk to your tax adviser. Or, stop by our Solutions Center and find a great fee-only financial adviser.
4. Unreimbursed Medicare expenses
For decades, you watched as a significant portion of your paycheck disappeared in FICA taxes intended to fund the federal government’s Social Security and Medicare programs.
Losing that money check after check has been painful, but you tell yourself it is all worth it. Someday, when you retire, the government’s Medicare program will pay for all your health care costs.
Medicare does indeed cover a large portion of retiree health care costs, but not all of them. This comes as a shock to some retirees.
In addition, despite years of paying FICA taxes, you still are required to pay a monthly premium for Medicare coverage during your golden years.
So, as we mentioned earlier, it is important to save money during your working years to cover these expenses after you retire. From the beginning of life until the very end, a free lunch is hard to find.
For more, read “Medicare Will Not Cover These 6 Medical Costs.”
5. Long-term care costs
Long-term care is truly the roulette wheel of retirement. Some retirees will be lucky enough to avoid these costs altogether.
But a much larger percentage will require long-term care services at some point. An individual turning 65 today has a nearly 70% chance of needing some type of long-term care service or support before they die, according to the Administration for Community Living.
This care can be incredibly expensive, especially if you require it for an extended period. About 1 in 5 seniors will need long-term care services for longer than five years.
How to prepare for the possibility of long-term care is one of the thorniest – and scariest – aspects of retirement planning. Buying long-term care insurance is one option. But such coverage is costly, and you may never need it.
There is no easy answer here. But educating yourself is the best way to decide whether this coverage makes sense for you. For more, check out “Should I Buy Long-Term Care Insurance?