You may have a retirement savings goal in mind that includes basic living expenses, travel, and any major purchases you plan to make. If so, you’re ahead of the game. About 46% of Americans are just guessing at how much they need, according to a recent Transamerica survey. But your retirement plan still may not be complete if you’ve forgotten about the following five costs.
1. 401(k) fees
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All retirement accounts, including 401(k)s, charge administrative fees that cover the costs of record keeping and special services, like account rollovers. The investments within your accounts may charge their own fees as well. Mutual funds — collections of stocks and bonds you buy as a package — charge an annual fee known as an expense ratio. You may also incur fees whenever you buy or sell an asset. These fees are automatically deducted from your account, so you may not even realize you’re paying them. But they can add up over time.
If your total 401(k) fees add up to 1% of your assets, you’re giving away $10 for every $1,000 you have in the account. On a $1 million portfolio, that adds up to $10,000 in fees in one year. While you may be able to make some adjustments to reduce your costs, like investing in index funds or other low-fee investments, you’ll always have to pay something. Your exact costs will depend on your account balance and your plan’s fee schedule, which you can find in your investment prospectus or your plan summary. Use the fee information and your estimated 401(k) balance in retirement to estimate how much you’ll pay in 401(k) fees, and make sure you have enough savings to cover these costs in addition to your living expenses.
2. Healthcare
Medicare will cover some of your health expenses in retirement, but it has its own costs, including deductibles, premiums, and copays. Plus, there are some services it doesn’t cover at all. If you want coverage for these things, you’ll have to purchase a supplemental health insurance policy and pay its premiums and deductibles, too.
Ideally, you’ll stay healthy in your old age, but you can’t count on that. The average 65-year-old couple retiring in 2019 will need $285,000 to cover their out-of-pocket retirement medical expenses, according to Fidelity. (Assumes both are eligible for Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, care at a skilled nursing facility, doctor visits and services, physical therapy, lab tests and more.) If you experience chronic health problems, that number could be much higher.
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Build healthcare costs into your retirement plan if you haven’t already. You can use the figure above as a baseline, but if you’re a long way off from retirement, you should figure higher. It’s not unreasonable to need $300,000 or more.
3. Inflation
Inflation drives up the cost of living, so $1,000 won’t get you as far next year as it does today. Most retirement calculators take inflation into account so you don’t need to worry about calculating this. The inflation rate changes from year to year, but historically it’s averaged around 3% annually. This is a good starting point, but if you’re concerned about not having enough, consider using a 4% annual inflation rate to be safe.
4. Penalties for not taking required minimum distributions (RMDs)
Once you turn age 70 1/2, the government forces you to start taking required minimum distributions (RMDs) from all your retirement accounts except Roth IRAs. It’s Uncle Sam’s way of ensuring he gets his cut of your savings. The amount you’re required to withdraw every year depends on your account balance and your age. You can use this table to figure out yours. Divide your account balance by the distribution period next to your age.
You must take out at least this much during the year. Otherwise you’ll pay a 50% penalty on the amount you should have withdrawn. It’s better to take the RMDs than to risk the penalty, but RMDs can have unintended consequences. They could force you to withdraw more than you wanted in a single year, which could raise your tax bill. You can avoid this by withdrawing more money from your tax-deferred retirement accounts before you have to start taking RMDs, though this will increase your tax bill during the early years of your retirement. Or you could move some of your money to a Roth IRA, but then you’ll have to pay taxes on the money in the year you do the conversion.
5. Taxes
Unless all your retirement savings are in Roth accounts, which are allowed to grow tax-free after you pay taxes on your initial contributions, you will owe the government some money in retirement. It’s difficult to say how much because you can’t know exactly how much you’ll withdraw in retirement or how the tax brackets will change. But you can use today’s tax brackets and your estimates of your retirement living expenses to get an idea of how much taxes could cost you.
Look at your estimated annual retirement income and subtract the amount you intend to withdraw from nontaxable sources, like Roth retirement accounts. Figure out which tax bracket that would put you in today and multiply that percentage by your estimated taxable income in retirement. Use this as a baseline to help you determine how much you need to cover taxes. You may want to leave yourself a cushion in case tax brackets change.
If you missed one or more of these five things when creating your retirement plan, take some time to redo it. It’s always best to figure high in case one or more of them end up costing you more than you planned.
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