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Five Retirement Costs to Watch

October 10, 2016

It’s hard to estimate how much you’ll be spending on health care this year, let alone for the next 30 years. Yet, many retirees must budget carefully to make their nest eggs last.

If you’re heading into your non-working years, pay special attention to the following five expenses. All of these costs can shift dramatically once you leave the workforce—for worse or—just as often—for better.

Health care spending. First, the bad news. Both health insurance premiums and out-of-pocket costs typically rise in retirement, sometimes dramatically. The Employee Benefit Research Institute estimates that in 2015, a 65-year-old man needs $124,000 earmarked just for health care expenses  which will give him a 90 percent chance of having enough money to cover care over the course of retirement. This amount doesn’t include long-term care expenses, either.

Insurance costs. The good news, though, is that other insurance costs can often be reduced or eliminated. Now that you’re not working, most retirees won’t need to worry about life insurance, which provides future earnings for loved ones left behind, or disability insurance, which replaces your income in the event that you can no longer work.

Retirement savings. If you were an aggressive saver in your working years, you might see a nice monthly budget boost now that you’re not setting aside dollars for your 401(k).

Housing and lifestyle expenses. Because retirement is different for everyone, lifestyle expenses can rise or fall in your non-working years. Paying off your mortgage before retirement can help, though, and often gas, clothing, and grocery expenses go down once you stop working.

Taxes. Money drawn from a Roth IRA will be tax free, while funds from your 401(k) or a traditional IRA will be taxed. Social Security income is taxed only if you have substantial income from other sources. And even then, you won’t pay federal taxes on more than 85 percent of your benefit. In general though, if you’re drawing less money from your investments than you earned pre-retirement, your taxes will probably go down.