You may believe you've developed a well-researched and comprehensive retirement plan, but be certain that your plan hasn’t left out any of these common issues. If so, you could end up with a much smaller retirement income than you expect, as your savings gets eaten up by these unexpected expenses. Motley Fool’s recent article, “4 Retirement Issues You're Probably Not Planning For,” discusses some of those unexpected expenses.
Inflation. Inflation is the quiet retirement-killer. It is the reason why a dollar won't buy as much today as it would 20 years ago. Inflation has averaged around 3% per year since the government began tracking it in 1913. Therefore, you can assume that your retirement savings will lose about 3% of their value every year. It is possible to beat inflation by selecting investments that will produce high enough returns to outpace the loss of your money's value. Stocks historically are the only investment to reliably beat inflation year after year: large-cap stocks produce an average return of around 10% before inflation over the past century. This is considered by many to be a good reason for retirees to keep some money in stocks, despite their volatility.
Taxes. If your retirement plan doesn't consider future taxes, your budget could be wrecked. Think about how you can minimize the amount of income you give to the government. The best way to go might be a Roth IRA. With a significant percentage of your retirement savings in a Roth, you’ll have greater control over how much income tax you pay each year. It also minimizes your required minimum distributions and allows your investments to grow tax-free, for as long as they are in the account.
Estate Planning. Without at least minimal estate planning, you place a terrific burden on your family. It could also mean that your beneficiaries will have greater expenses, like administrator's fees and other legal fees that will come out of your estate. The essentials of an estate plan are a will, naming beneficiaries for all your accounts, and a power of attorney in case you become incapacitated, along with an advance medical directive to direct the types of extreme lifesaving measures you want your physicians to undertake, if you're incapacitated. You should also ask your estate planning attorney about setting up trusts to manage probate issues and estate taxes.
Long-Term Care. The average cost of long-term care for a couple is around $130,000. Therefore, you should add in long-term care expenses to your retirement planning. Don’t rely on Medicare to help with these expenses because it doesn’t cover long-term care expenses, unless there's a clear medical necessity, and even in that case, Medicare only covers the first 100 days. Purchase long-term care insurance to protect yourself from these expenses. You should get it while you're relatively young and in good health to keep your premiums as low as possible. A long-term care insurance premium is predictable and easier to fit into your budget than unexpected long-term care you pay for out-of-pocket.
If you wait until you are retired to add these expenses into your budget, you may need to make some significant sacrifices to fit them in.
Reference: Motley Fool (October 1, 2017) “4 Retirement Issues You're Probably Not Planning For”