These 3 retirement expenses are an unwelcome surprise to many seniors | Smart Change: Personal Finance

These three expenses in particular often surprise seniors. Take some time to review your retirement plan and make sure you’ve budgeted enough for them.

Health care costs usually rise with age. Most seniors have Medicare to help them with some of their medical expenses, but you still owe premiums and deductibles and deal with this. In addition, there is a lot that original Medicare does not cover, including prescription medications, dental care, and hearing aids.

Even if you do your best to stay healthy, you still need to set aside a large amount for medical savings. A married couple 65 years old and retired in 2022 can expect to spend about $315,000 on health care, according to Fidelity. Some will spend a lot.

Health savings accounts (HSAs) are great tools to help you with medical savings. Contributions to these accounts lower your taxable income for the year, and money you spend on medical expenses is tax-deductible. You can contribute up to $3,650 to an HSA in 2022 if you have an individual health insurance plan with a deductible of $1,400 or more. Families may contribute up to $7,300 if their health insurance plan has a deductible of $2,800 or more. Adults 55 and older can add an additional $1,000 to these limits.

Additionally, you should research your health insurance options. Some people choose to add a Medicare supplement or a discount dental plan to their budget to help them cover some expenses not covered by Original Medicare.

Housing is the biggest expense for most people of all ages, and that’s true for many retirees as well. If you rent or still have a mortgage, you will need to make regular monthly payments when you retire, so be sure to budget accordingly.

Even if you own your entire home, you will still have to pay property taxes and home insurance premiums each year. And you’ll likely incur periodic expenses, such as repair costs if something breaks in your home. So I still need some money for housing.

If you wish, you can try to pay off your mortgage before retirement. Or you can wait for mortgage rates to drop again and refinance for an affordable monthly payment. You can also try reducing the size as well. But before you do that, make sure that it will actually save you money. If housing prices in your area have increased since you first bought your home, or if you intend to move to a more expensive area, buying a smaller home may not save you any money.

Unless you keep all of your retirement savings in Roth accounts, you’ll owe some taxes when you retire. The amount depends on how much you withdraw from your savings annually and the account(s) they come from. And obviously, if you’re working in retirement, you’ll owe income taxes on your paycheck as well.

Storing some money in a Roth account or making a Roth IRA transfer can help you reduce your tax bill in retirement. Beyond that, you need to estimate which tax bracket you will fall into and budget for that. Then, once you retire, monitor your place in your tax bracket and try to avoid jumping to the next bracket whenever possible.

Don’t forget the Minimum Required Distributions (RMDs). These are mandatory retirement account withdrawals that everyone must make from most retirement accounts once they turn 72. There is an exception for Roth IRAs and workplace retirement plans if you’re still at 72. If you don’t make these withdrawals, you face severe penalties, so remember to account for these and their impact on your taxes.

Retirement will likely contain some unexpected expenses, even if you plan for the three things listed above. This is why it is smart to build a small pillow in the nest egg if you can. Otherwise, you can make a backup plan, such as returning to part-time work, if you notice that you are draining your savings faster than expected.

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