If you don’t plan for these big four elements of retirement costs, all of your hard work in planning for retirement—not to mention a lifetime of saving and investing—could easily evaporate. When savings are consumed by unexpected costs, retirements can be ruined. A recent article in Motley Fool, “4 Retirement Issues You're Probably Not Planning For,” provides practical and actionable information.
Inflation. Inflation is the quiet retirement-killer. It is the reason why a dollar won't buy as much today as it would 20 years ago. Inflation has averaged around 3% per year since the government began tracking it in 1913. Therefore, you can assume that your retirement savings will lose about 3% of their value every year. It is possible to beat inflation by selecting investments that will produce high enough returns to outpace the loss of your money's value. Stocks historically are the only investment to reliably beat inflation year after year: large-cap stocks produce an average return of around 10% before inflation over the past century. This is considered by many to be a good reason for retirees to keep some money in stocks, despite their volatility.
Taxes. If your retirement plan doesn't consider future taxes, your budget could be wrecked. Think about how you can minimize the amount of income you give to the government. The best way to go might be a Roth IRA. With a significant percentage of your retirement savings in a Roth, you’ll have greater control over how much income tax you pay each year. It also minimizes your required minimum distributions and allows your investments to grow tax-free, for as long as they are in the account.
Estate Planning. Without at least minimal estate planning, you place a terrific burden on your family. It could also mean that your beneficiaries will have greater expenses, like administrator's fees and other legal fees that will come out of your estate. The essentials of an estate plan are a will, naming beneficiaries for all your accounts, and a power of attorney in case you become incapacitated, along with an advance medical directive to direct the types of extreme lifesaving measures you want your physicians to undertake if you're incapacitated. You should also ask your estate planning attorney about setting up trusts to manage probate issues and estate taxes.
The High Cost of Long-Term Care. Don’t make the common mistake of relying on Medicare to pay for long term care. The average cost of long term care is around $130,000. Unless there’s a clear medical necessity, Medicare only covers the first 100 days. Buy long term care insurance while you are relatively young and healthy, so that premiums can be manageable. It is better to have a fixed item in your budget than the unexpected massive costs of long term care.
If you miss these in the planning process, it’s possible that your retirement income and quality of life during retirement may be different—and not in a good way—from what you had envisioned.
Reference: Motley Fool (October 1, 2017) “4 Retirement Issues You're Probably Not Planning For”