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3 Potential Retirement Surprises You’ll Want to Get Ahead Of

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Life doesn’t stop throwing you crooked when you retire, and unfortunately, many who find the elderly unprepared hit them straight in the wallet. While some costs are truly unpredictable, you can save yourself a lot of headaches by planning these three “surprises” for retirement.

1. Medical costs

There is no way to know exactly how much you will spend on retired medical care, but if you get the health care you need, it’s safe to assume it will cost you a lot. You will have Medicare premiums, payments, and franchises, and you may have to pay extra for prescription drug coverage, hearing aids, or long-term care. According to a study by Fidelity, the average health care cost for a 65-year-old couple retiring in 2021 will be $ 300,000.

A mature person stares at the computer screen in shock

Image source: Getty Images.

One of the best things you can do for this is to buy enough robust health insurance. It’s not cheap, but it can turn an unpredictable cost into a more predictable one, making it easier to finance.

Most retirees have Medicare, but that doesn’t cover everything. You will need a prescription medication plan if you do not want to pay for the medication out of pocket. You may need to look for a Medicare Advantage plan or a Medicare supplement plan to help you cover some things that genuine Medicare does not do, such as hearing aids and dental care.

No matter what you do, you will still have some health expenses in retirement. For these you can save ua health savings account (HSA) if your current health insurance can deduct $ 1,400 or more for an individual or $ 2,800 or more for a family. Individuals can set aside up to $ 3,600 a year in 2021, while families can save $ 7,200.

The money you invest in the HSA reduces your taxable income for the year and if you end up spending it on medical expenses, you won’t pay taxes at all. You can also withdraw funds for non-medical use, but if you do, you will have to pay tax on the money, plus a 20% penalty if you are under 65 years of age.

2. Tax

It may seem obvious that you will have to plan for a retirement tax, but many people forget that. This can lead to them saving their pension faster than they expected.

You will hardly be able to completely avoid taxes in retirement. But you can reduce the amount you pay with a smart withdrawal strategy.

You will owe tax on the money you withdraw from deferred taxes pension accounts, like most 401 (k) s and traditional IRAs. But you will not be liable for the tax on raising the Roth pension account. This is because you pay tax on Roth contributions in the year you paid them.

You can use your estimates of annual retirement expenses and current tax brackets to get an idea of ​​how much you could owe. To reduce your retirement tax, you could rely on a tax deferral until your income approaches the point where you would move to your highest marginal tax category. Then move on to eavesdropping on your Roth accounts, if you have any. This will prevent you from having to pay a higher tax rate on those funds.

Or you can try a proportional withdrawal strategy. If, for example, you have 60% of your retirement investment in tax-deferred accounts and 40% in Roth accounts, then you would withdraw 60% of the money you need from your tax-deferred accounts each year and 40% from your Roth accounts . This can also help you reduce your overall tax bill in retirement.

3. Minimum distributions required

Once you turn 72, you will need to withdraw at least a certain percentage of the assets you have in most of your retirement accounts each year. required minimum distributions (RMD). The exception to this rule is if you still work and do not own more than 5% of the company in which you work. In that case, you can postpone taking the RMD from the retirement accounts associated with that job – but only until the year you retire.

All pension accounts except Roth IRA have RMDs. Interestingly, Roth 401 (k) s, although taxed in the same way as Roth IRAs, have RMDs. But you can get around that requirement by transferring your Roth 401 (k) funds to a Roth IRA before you turn 72.

For most people, RMDs will not be a big problem. You will probably need to withdraw more from your retirement accounts than you would be forced to in any given year anyway. But those hoping to keep their savings in their retirement accounts for as long as possible may have to raise more than they originally planned.

You don’t want to skip RMDs – it will cost you a 50% penalty on the amount you should have withdrawn. It will certainly be more than the taxes you would pay to do what you should.

Get to know the workings of RMD and, if you are approaching the age at which you will have to start taking them, estimate how much you will have to withdraw. If it will increase your tax bill, be sure to fund this additional expense.

You will not be able to avoid these retirement costs, but planning for them in advance can prevent a lot of inconvenience. If you haven’t already, go back through your retirement plan now and adjust it accordingly. This may mean that you need to increase your pension contributions. But for years, when the bills start rolling, you’ll be glad you did.

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