It’s no secret that retirement is expensive. According to the Bureau of Labor Statistics, adults 65 and older in the United States spend an average of about $46,000 per year, and after decades of retirement, you can easily spend hundreds of thousands of dollars.
However, you may not consider some of the expenses that may make retirement more expensive. Moreover, if you do not consider these hidden costs, your savings may last a long time.
1. High 401(k) fees
Even if you don’t realize it, you have to pay for your 401(k) investment. Each retirement account will charge fees, but some plans charge higher than others.
According to a report by the Center for American Progress, the average annual fee charged for 401(k) plans is 1% of the assets under management. So, for example, if you have $100,000 in your 401(k), you will pay $1,000 each year.
It may not sound like a lot, but when your funds have been invested for decades, these costs add up. According to data from the Center for American Progress, a worker who pays an average of 1% of 401(k) fees each year will only pay more than $138,000 in their lifetime. However, if your annual fee increases to only 1.3% per year, you will spend more than $166,000 in your lifetime.
To see how much you are paying, check the plan statement or contact the plan administrator. If you find that you are paying higher than average expenses, you can save thousands of dollars by switching to another type of retirement account.
2. Long-term care costs
According to the US Department of Health and Human Services, nearly three-quarters of elderly people will eventually need long-term care. If you are lucky, as you age, you may be able to rely on your loved ones to take care of you. However, not everyone enjoys this privilege, and the price of long-term care is high.
According to the Department of Health and Human Services, the average annual income of semi-private rooms in nursing homes will exceed $82,000, and Medicare generally does not provide long-term care. Therefore, if you are not prepared to spend money for this, you may pay a huge price.
One way to reduce out-of-pocket expenses is to join long-term care insurance. Although the premium may be high, the earlier you register, the less you will pay each year. Moreover, high premiums may still be preferable to paying out-of-pocket long-term care costs of tens or even hundreds of thousands of dollars.
3. Retirement tax
Taxes will not disappear after leaving work, and you may have to pay taxes for retirement account withdrawals and social security benefits.
Withdrawals from 401(k) or traditional IRA are subject to income tax. In addition, once you are 72 years old, you need to start withdrawing the required minimum distribution (RMD) from these types of accounts, even if you are still working at that age. If you fail the RMD, you will be fined 50% of the withdrawal amount.
Your social security benefits may not evade taxes, and the amount you owe will depend on the so-called “consolidated income.” Your combined income is your annual benefit amount plus half of your adjusted total income. If it exceeds $25,000 per year (or the income filed by the husband and wife exceeds $32,000), you should pay tax on at least part of the benefit.
Don’t let these hidden costs ruin your retirement
Retirement planning is difficult, especially when you consider how much to prepare for. However, the more you can plan for expected and unexpected costs, the better your life after retirement will be.