There are seven big retirement expenses you need to account and plan ahead for. Doing so is going to fully prepare you for this next stage of life.
As we think about retirement expenses, a lot of people think about adding a travel budget or an additional entertainment bucket. However, some of the biggest expenses that you’re going to have are not those. Much of the spending you do while working is actually going to carry over into retirement. Some things might drop off like commuting expenses, but a lot of things carry over.
Expense #1: Healthcare
The first expense is healthcare. If you retire before 65, the average couple could spend up to 17K out of pocket each year until they enroll in Medicare at age 65 (according to Kiplinger Magazine). If you’re 65 the expenses are a little bit less, but over time healthcare spending is likely to be one of the bigger expenses that you face in retirement.
This could change in the future with technology, but it’s something to model into a plan as you map out these expenses.
Expense #2: Taxes
The next expense to think about is taxes. If you’re living off social security, a brokerage, or a bank account, it’s likely you won’t have to worry about a big tax issue. However, if you’re like a lot of our clients, you might realize that taxes in retirement can actually go up. Many times, we see a dip in taxes right after the retirement date. Then all of a sudden we don’t have work income anymore and, a lot of times, taxes decline.
What happens later in life as you get into your 70s is you have to start taking out of your IRAs and pre-tax monies. A lot of times, we see taxes go up for those people who have a lot saved in those pre-tax accounts. Your 70s could be a ways off, but if paying the least amount of taxes over your lifetime is important, then you want to plan for it now.
Right now we’re at historically lower tax rates. This is why having an ongoing system of tax planning, review, and a tax-efficient withdrawal strategy can be so important. I did another video called How to Get More Into Roth. It shows the impact of just a little bit of planning and how it could actually save millions over someone’s lifetime.
Expense #3: Maintaining the Home
The next expense people tend to overlook is home maintenance. If you plan to stay in your home through retirement, you might see home maintenance costs actually increase. Why would that be?
The first reason is that a lot of clients start to value their time in retirement differently than they did before. Take cleaning the gutters or the windows, for example. That’s easy enough to do in the past, but you might get to the age where you’d rather do something else. The value of someone else doing that may outweigh the cost of paying for it, and then you can spend your time on something else that you’d rather be doing, even if it’s just going to the cafe and reading a book.
If that’s not you and you say, “I’m always going to be doing these household things. I’ve done it all my life,” that’s great. However, keep in mind that there’s going to be an age where getting on a ladder to clean the gutters is no longer going to be worth it, just out of health and safety for yourself.
Expense #4: Travel
The next expense that usually increases in retirement is one that is on a lot of people’s bucket lists, and that’s travel – especially right after you retire in those first 10 or 15 years of retirement. Sometimes we refer to this as the go-go years.
Expense #5: Kids & Grandkids
The next expense is kids and grandkids. Whether it’s traveling with them, gifts, or experiences you want to have with them when they’re young. Another big one with grandkids is funding future schooling for them.
Expense #6: Your Health
The next one is an expense, but it’s also like an investment, and that’s just your health and fitness. It is so essential as you’re planning and living in retirement. It’s a need if you want your retirement to be a good one. As you age, you have to prioritize health. Some people even hire a physical trainer just to get them in the right shape when they first enter retirement to create a sustainable routine well into retirement.
The cost of maintaining a healthy lifestyle can add up, and it’s crucial to factor in the gym memberships, the classes, or other health related things like food. The more expensive food is sometimes the more healthy food.
Expense #7: Entertainment
The last one is entertainment. You have the time now to enjoy and explore your passions and interests. Having a budget for this is going to be important in making sure you don’t neglect those 3 C’s we often talk about.
We like to add a separate line item – either on the budget or when we’re looking at the plan – to see if we increase entertainment expenses by x amount, how does it impact the plan? As long as it’s not crashing the plan, then we’re all for spending money on these things.
Categorize Your Expenses Into Two Categories
There are two important things to think about and put these expenses into: the needs and the wants. There are the actual essentials you need to live like housing, medical, food; the things you need to live your normal life.
Separate those things from the wants. You get to decide where everything falls. The reason this is so major is because then, during a time of a longer-than-expected bear market when things are a little less certain than you’d like, knowing exactly what the dollar amount of the needs is and realizing, “Oh okay, we just won’t do this trip right now,” is a quick way to remind yourself things are going to be okay.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
Changes to the Secure Act 2.0 were signed into law at the end of 2022, and there’s a lot of changes to existing retirement savings and withdrawal rules. However, since so many people in their 50s and 60s, and even their 70s, wish that they had more money in their Roth accounts, I’m going to focus on what those changes to this new bill mean to Roth IRAs in a few ways that you might be able to actually get more into those accounts moving forward.
In my opinion, this is really good news – especially if you’re thinking about your retirement more, but really only if you know about it, know what the rules are, and then take advantage of it.
We’re going to go over six different changes here, and the first one has to do with Roth RMDs. So this first one applies to you if you’re keeping any money in your work retirement plans, like a Roth 401(k) or a Roth 403(b).
Change #1: Roth RMDs
Right now, RMDs (required minimum distributions) are the amounts that we have to take out of these accounts. Those RMDs apply to your Roth 401(k)s and 403(b)s, which means you’re most likely forced to withdraw money from those accounts even if you don’t want to when you get into your 70s. After 2023, there will no longer be RMDs for those types of Roth accounts, meaning no Roth RMDs for those accounts while you’re living.
After you pass away, the people who inherit your Roths will have to start doing these RMDs. While you’re living, those should be removed or those should be going away. As you might know right now, if you’ve got just a regular Roth IRA, you aren’t forced to take out and you aren’t forced to do RMDs from those accounts. However, if you liked your custodian or if you liked the 401(k) or 403(b) where your money is now, and you’re going to have that in retirement, usually in the past you would then have to take money out of there.
Previously, a lot of people would roll over accounts to Roth IRAs, but now it’s just one less thing that you have to think about. And again, after the account owner dies for these accounts, the same rules apply to Roth IRAs and Roth accounts as they did before the Secure Act 2.0.
Change #2: 529 Education Account
The next change will come into play if you’re helping pay or want to help pay for your grandkids’ college, or maybe paying for your kids’ college through the use of a 529 education account; or if you already have a 529 and everyone’s already out of college. Currently, money from a 529 that’s taken out for things other than education costs can be taxed and penalized, but moving forward, under certain conditions, this Secure Act 2.0 adds a new way to move money from a 529 to a Roth IRA without paying those taxes or penalties.
That means that beneficiaries would be able to move up to $35,000 from a 529 into a Roth IRA in their name. Now, the rollovers would be limited to the Roth IRA’s annual contribution limit so each year you’d have to do rollovers. Then the 529 would have to be opened for at least 15 years.
Let’s say that you’re contributing to your grandkids’ future college. You’ve got a five-year-old grandchild right now, and they turn out to be a genius just like you thought and get a full ride to college. That money that you put into the 529 isn’t going to be used for college expenses.
This rule then could apply and you’ve got that $35,000 rollover potential to a Roth IRA. The thing that we don’t want to have happen is contributing to a 529, and then nobody using it for college costs, and then taking it out and having to pay the tax or penalty. This is a nice little added bonus for the Secure Act 2.0.
A few rules around that one – earnings and contributions would be treated like any other Roth account or rollover. However, the income limitations to be able to contribute to a Roth IRA is removed for the 529 to Roth rollover, but the annual contribution limit remains the same. Talk to a financial professional or CPA if you’re thinking about how this could work for you.
Change #3: Self Employed
Now, this next rule or change is a good one for someone who’s self-employed or works for a small company that doesn’t offer a 401(k), but offers either a SIMPLE IRA or a SEP IRA. This could also be good for someone who has a regular job and a side hustle that’s earning some income, or maybe is thinking about having some sort of side hustle in retirement.
Right now, you cannot put money into a Roth with a SIMPLE or a SEP IRA. Those are two types of accounts you could open up if you’re self-employed. That’s going to change though under this bill, which would make it possible for a SIMPLE plan or SEPs to accept Roth contributions, which is nice because when we’re thinking about small businesses or earning extra income in retirement, typically it’s not big money we’re talking about.
Hence, not a lot of it is going to be taxed if that’s the case, and this will just allow you to get more money into a Roth as a result, which is a nice bonus.
Change #4: Contributions to 401(k)
This change is related to you if you’re over the age of 50 because it has to do with catch-up contributions to your 401(k)s or 403(b). And this is a negative change in my opinion.
Say you have $145,000 in your Roth 401(k) already and you make a catch-up contribution of $7,500. The new rule says that it has to be Roth. The reason why I think this is a negative is because it gives us a little bit less control. For example, if you’re 55 and you have over 145K in your Roth 401(k) right now and you make a catch-up contribution, you might also have a higher income right now than you will in retirement. Therefore it could make sense to do a pre-tax catch-up contribution instead of a Roth. It’s not a huge deal, but it’s just a little optimization.
Change #5: Employer Matching
The next one is a change to employer matching. Employers will be able to match contributions now to 401(k)s and 403(b)s and government 457 plans on a Roth basis, whereas before it was always pre-tax basis. This change doesn’t force plans to offer this, but it does make it possible for them to do so, whereas before that was not the case. If you’re employed and they offer this, it could make sense if you want to get more into Roth.
Change #6: Roth IRA
This next one is one where you might think, “How does this impact my Roth IRA or getting more into it?” But it’s around this Roth conversion strategy.
Last year, the RMD (required minimum distribution) age that you had to start taking out of your pre-tax monies was 72. Now with the Secure Act 2.0, the minimum age for distributions to start would go up to 73. That’s for people who reach that age in the year 2023 and beyond. What does this have to do with Roth money?
You might have seen another video that I did on the Roth conversion sweet spot, which talks about the best ages to convert from your IRA to Roth with the main goal of paying the least amount of tax over your lifetime. That’s what we’re trying to do for many of our clients. By pushing back the RMD age to 73, that gives you a little more control over when and how much you decide to convert; spreading out conversions could really mean thousands of dollars in tax savings to you in some cases. As you’re thinking about Roth conversions, check out the DIY retirement planner. Part of the planner is really focused on Roth conversions and setting up a potential plan for you. As always, be sure to talk to your financial team before making any big decisions like this because there’s so many different moving parts and components to do something that fits you just right. If you’d like to reach out to us, you can do so by clicking here. We sometimes get inundated with a lot of requests and calls, but we can get back to you either way just to share what’s happening over here.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
Have you ever heard of healthcare costs spiking for retirees or pre-retirees because of a thing called IRMAA? Whether you have or you have not, it’s worth knowing about so that you can make the best financial decisions for your situation. We’ve seen it happen quite a bit where people are surprised by the cost of their Medicare Part B premiums because of a financial decision that they’ve made years ago.
In this video I want to give you a look into this idea of IRMAA so that it doesn’t happen to you. If you’re older than 60, this is worth knowing right now, and if you’re younger than 60, watch this video and just store it in the back of your brain for a few years from now.
Health Insurance Premiums
First, let’s do a quick intro of health insurance premiums. If you’re under age 65, then the cost of health insurance is influenced by your age and where you live, deductible, and your income. Those are a few things that really impact health insurance costs. Then when you get to age 65, you start paying Medicare Part B (most likely), and the only factor that impacts that cost is income. Depending on your withdrawal strategy you use, this can really impact how much you pay for your health insurance premiums.
First off, what is IRMAA? It stands for Income-Related Monthly Adjustment Amount, and that’s the amount that you may pay in addition to your Part B or Part D premium if your income is above a certain level. It’s determined based on your MAGI, (Modified Adjusted Gross Income), which is on your tax return. So that MAGI number, the one that’s reported on your taxes from two years prior, is the number that is used when factoring in this IRMAA calculation.
If you’re 63 or older, this will most likely apply to you now. For our clients, we start thinking about this at age 60, especially if there’s a future transaction that’s going to cause a change in your income or you might be thinking about Roth conversions, or switching locations in the future.
If income is less than 194K per year, then no need to worry about IRMAA. What happens is a lot of people will have taxable income or MAGI less than that each year, but sometimes there’s something that could increase their income in one year and we’re going to go over those to just make sure that you’re aware of it. Then I want to show a few what-if scenarios to give you some more examples of what this could mean for you.
Social Security
Now what’s the first thing that can really impact MAGI? Social Security. What you take from Social Security will increase MAGI, so for many, the Social Security that you get is going to be 85% of what you receive is taxable and is what gets added. Something that could increase MAGI is a home sale. Let’s pretend that you’re in retirement, and you’re receiving income from Social Security, and maybe some investments from your nest egg, and you’re ready to move to your retirement destination. If you’ve been in your home for a while, there’s a chance that you may have bought it at a much lesser value and now it’s a lot higher, so there’s a potential gain from what you bought it at to what the value is now. If that gain is greater than 500K, then you may have to pay tax on whatever the excess is. Let’s pretend the gain was $600,000. You may have to pay capital gains tax on 100K, which means you’re increasing your MAGI and could increase Medicare Part B premium. Now this has happened for a lot of clients who are in real estate and now in retirement, and they may start to sell some of the different assets because they want to simplify things and they just have to be prepared that the costs are going to go up when it comes to Medicare premiums.
When you think about it, is it a smart move to tell the buyer of your home, “Hey, could you buy the house for 100,000 less so that I can avoid an increase in Medicare costs?” Probably never. The cost increase might be a very small percent to what you’re actually getting from the gain. Just remember most of the time the increase in our income outweighs the cost of increasing Medicare costs, but there is an instance where you might not get immediate income or you might not get immediate benefit and still have a higher Medicare cost. If you want to apply this to your own finances or your own retirement plan, use the DIY retirement planner because it’s our favorite consumer-facing retirement planner that can factor in IRMAA as well.
Roth Conversions
Onto the one thing that could impact IRMAA and Medicare costs without any immediate benefit to you, and that is Roth conversions. Roth conversions can increase MAGI and Medicare Part B premiums two years following the year of the conversion. If you’re 63 and older, any conversion you do could start impacting that Medicare cost, so there are many things to factor in when you’re doing conversions. The main goal for Roth conversions is just to pay the least amount of tax possible over your lifetime, but I will say that a properly designed Roth IRA conversion strategy will include tax strategy and the impact on Medicare costs as well.
The big takeaway here when planning out healthcare premiums is don’t let IRMAA be the main driver of your decisions. Yes, it’s good to be aware of the impact of your financial decision so you’re not surprised, but don’t make a decision not to do something because of IRMAA. It’s a factor in the decision, not the deciding factor. And as always, talk to your financial team before doing anything. Look at all the options and pick the one that’s best for you. If you don’t have a CFP who’s been doing this for a long time, reach out to us. If we’ve got space then we’d be happy to have a call. We don’t always, but I’ll get back to you either way.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
Recent Comments