As the founder of an agency that works with Medicare insurance products, I’ve worked with thousands of people as they are beginning their retirement journey.
This should be a time of life when you are excited about the future and perhaps looking forward to more time with loved ones or world travel during your golden years.
Unfortunately, for many people, there are often some financial surprises that they didn’t expect and that can derail their plans. Sometimes we even see people who decide to postpone their retirement and work a few more years to make up for their shortages.
It’s important to know what these things are and plan accordingly so that you can enter your own retirement free of worry and financial stress.
In fact, I wish there were college courses on retirement expenses so that more people would be aware earlier in life when they still have time to plan accordingly and put things into place that would save them from retirement blunders.
Here are some of the things you should know now so that you can take action and be ready for your own retirement when the time comes.
Healthcare in Retirement is Expensive
Here in America, our national health insurance program for people aged 65 and older is Medicare. Most millennials and Generation Xers have a vague idea what Medicare is, but they know very little about what Medicare covers and more importantly, what it costs.
Some people assume that since Medicare is a federal program, it must have no monthly premiums, similar to national health insurance programs in Canada or Britain, where the government provides the insurance.
Unfortunately, Medicare isn’t free. You’ll pay taxes toward a part of your Medicare benefits during your working years and then when you retire you will also pay monthly premiums for outpatient coverage and drug coverage.
Furthermore, Medicare doesn’t cover all of your medical expenses. On average, it will cover about 80% and you will be responsible for the rest in the forms of deductibles, copays, and coinsurance – just like you are now on your current health insurance coverage through your employer or through the Healthcare Exchange.
For this reason, most Medicare beneficiaries buy supplemental coverage to fill in the gaps. This, of course, costs even more money.
Taken all together, this can quickly add up to expenses well over $600/month or more for an average couple.
Long Term Care Isn’t Covered
To top it off, there are some things Medicare doesn’t cover at all that you will have to pay out of pocket for when you retire. This includes routine dental, vision and hearing services as well as long-term care.
It is estimated that one of out of every two individuals will one day need to stay in a long-term care facility.
Due to medical technology, we are living longer these days. For many people there comes a day when they simply aren’t able to care for themselves independently anymore.
Though Medicare will continue to pay for their medical expenses throughout their lifetime, it doesn’t cover the cost of an assisted living facility or nursing home.
This is a tremendous expense for which you will pay privately.
A Fidelity study estimated that the average 65-year-old couple will need approximately $280,000 for the costs of healthcare in retirement. This study did NOT include the potential costs of long-term care, so you can only imagine how much that couple will need if one or both of them end up in a long-term care facility.
Your Living Expenses May Not Be as Low as you Think
In addition to healthcare expenses being unexpected, many of our clients tell us that their living expenses in retirement aren’t as low as they expected.
While they may spend less on fuel since they are no longer driving to and from work every day, they tend to spend more on entertainment activities like golf and travel.
When people are younger, they also expect to be free of home debt when they turn 65, but the reality is that when they actually arrive there, some of them aren’t even close to paying off their homes.
With mortgage refinancing these days, there are a good many people who carry their 30-year-mortgage into retirement with them.
They also still have ordinary expenses for utilities, groceries, and insurance – things that don’t go away simply because you’ve retired.
So now that you know some of the kinds of expenses that I’ve seen which are catching new retirees off guard, let’s go over some ways that you can be better prepared by taking certain steps now while you are younger.
You’ll want to start with a visit to a financial planner to estimate your future expenses for all of these things I’ve mentioned.
Go in with the mindset that Social Security is just a safety net and shouldn’t be counted on. The average Social Security check in 2019 is around $1400/month, and this is a pittance in the grand scheme of things.
Be sure that your planner also remembers to include healthcare expenses in your retirement savings target. Once you’ve set your retirement savings goals, then you can begin taking action.
Aim to Be Debt Free
Many financial planners will tell you that the best thing you can do for your retirement is to be debt free when you enter it. This means you’ll want to sit down and estimate your future retirement costs while you are still in your 20’s or 30’s and map out a plan to make that happen.
Time is your friend at this point, and you should use it well.
If you want to retire early at 60, then you don’t want to take on a 30-year mortgage any later than age 30. Buy a home that is well within your means and pay ahead on your mortgage whenever possible.
If you can pay the mortgage off early, you’ll have a few years between the end of your mortgage and the beginning of your retirement. You can use those years to pile even more money into your retirement savings.
Likewise, you’ll want to pay off your car before you retire to avoid the added stress of a car payment once you are living on a fixed income.
Consider buying a used vehicle with relatively low miles. You can afford the immediate depreciation of a brand-new car while still buying a vehicle that can go the distance with you.
Save Specifically for Healthcare Expenses
I’ve noticed that my clients who are the most financially comfortable and secure are the people who came into retirement with a nest egg of money set aside specifically for healthcare-related expenses.
One of the best ways that you can do this is through a Health Savings Account. If your employer offers a qualified high deductible health plan, you can open a health savings account and start saving for your future Medicare expenses.
Money that you contribute to your H.S.A. is not only deductible to you now on your taxes, but it also grows interest that compounds over time. You can use the money in the account for qualified healthcare expenses now and later.
The earlier you open one of these accounts, the better.
We tend to spend less on healthcare expenses while we are younger and healthier, and this gives your account time to grow.
Later when you retire, you can use money that you’ve saved up in your health savings account to pay for Medicare premiums, deductibles, co-pays, and coinsurance. You can also use the fund to pay for some of the dental, vision, and hearing expenses that Medicare does not cover.
If you find that you have saved more than what you need for healthcare, you can even take the money out for non-medical expenses once you reach age 65. You’ll just pay ordinary interest and there is no penalty.
This makes a health savings account one of the most amazing vehicles for retirement savings.
I’ve noticed that people who have a healthy H.S.A. at retirement tend to think of this as separate money for healthcare and it takes away much of their worry over what bills might appear in their mailbox after a hospital stay or surgery.
It’s a type of rainy-day medical nest egg with which you just can’t go wrong.
Consider Long-Term Care Insurance
Since chances are good that you may need long term care someday, one way to prepare for that now is to purchase an insurance policy that will help you to pay for these expenses should you ever need them.
It’s important to realize that having the right long-term care insurance policy will also extend you a great deal of freedom in choosing how you get future care. There are policies that offer the flexibility for you to have someone help care for you in your own home, thereby postponing the need for you to leave your own home.
The earlier you buy a long-term care insurance policy, the cheaper the premiums will be.
Consider buying one in your late 30’s or early 40’s rather than your 60’s, and you’ll find that the premiums are quite reasonable when you buy young.
You’ll also have a better chance of being approved for coverage when you are younger and may have fewer health conditions or medications.
Budgeting for this policy will provide you great peace of mind as well, knowing that you won’t be a burden to anyone if you have needs for care earlier than you had planned.
Max Out Your 401K
As we said earlier, time is your friend.
Starting a 401K in your 20’s or 30’s is wise. Aim to at least contribute at least enough to qualify for the full company match, and then with each successive raise or promotion, grow the percentage that you are saving. When you increase your contributions slowly over time, you’ll find that you rarely miss the money.
Because you are young, you can also afford to invest that money into some fairly aggressive funds. Commit to contributing regularly so that you have both compounded interest and dollar cost averaging working for you.
People who automate their savings often fair very well over the long term.
As you age, you can change some of your asset allocations, but right now, you can invest heavily in stocks because you’ve got plenty of time to weather any dips in the market.
Develop a Minimalist Lifestyle
Some of our happiest clients are those who have downsized over the years rather than upsized. Living within your means can seem challenging to many but there is also great freedom that comes from a home and life that is free from too much retail therapy.
We’ve got several clients who sold their homes as soon as their kids were grown and then moved into a smaller apartment or condo to maximize their savings.
They sell off most of their belongings and find that an uncluttered life is wonderful!
Some of them purchase RVs and travel the United States while others move to states with lower taxes and lower cost-of-living. Having less stuff affords them the ability to move more easily and quickly if they want to do so.
If you take these actions early on in your working years, you’ll be truly amazed at how much you can put away over the course of 20, 30 or 40 years.
Then someday, you’ll get to be one of those people who walk into my office smiling with no fear about what their healthcare will cost because they’ve taken the necessary steps to ensure their money will go the distance.
Danielle K Roberts is the co-founder of Boomer Benefits where she and her team help baby boomers navigate their Medicare insurance options. She is a member of the Forbes Finance Council and writes frequently about Medicare, retirement and personal finance.