Retirement planning is difficult. How can you plan for every single piece of your golden years without experiencing it yet? However, there are several common factors that are often left out of retirement planning. Continue reading to learn the top three factors you forgot to consider when you were planning your retirement.
Inflation is the increase in the cost of goods over time. This increase in costs is known as the Consumer Price Index (CPI). Each year, goods increase by about 2 to 3% in price each year. However, healthcare costs, prescription drugs, and medical aids increase each year by around 2 to 5% each year. Just as the cost of a gallon of milk has changed drastically from when you were a child to now in adulthood, the cost will be exponentially more from now to when you are in retirement. Inflation will cause major changes in the price of your groceries, living costs, healthcare costs, and more. When saving for retirement, be sure to account for these inflation costs to make sure that you’re covered.
Unfortunately, taxes do not stop in retirement. If you have funded retirement accounts with pre-tax dollars, such as 401(k)s, your withdrawals are taxed. You can also be taxed on your investment activity and Social Security benefits. If you do not account for taxes when planning for retirement, you could be left with some major shortfalls each year. When planning what your annual income will be from your savings in retirement, you need to account for taxes so you have a correct calculation of how much money you will actually have to use in retirement.
Budgeting each month never ends, especially when you’re on a fixed income. It’s important to budget your spending to make sure you are not living beyond your means. One of the key reasons to budget is to properly account for taxes and inflation. You can look at your current spending to help estimate what your spending would be in retirement. Be sure to include groceries, entertainment, transportation costs, healthcare costs, any travel plans you may have for your retirement, and living expenses in your budget. It’s also important to keep in mind that as you get older, your healthcare costs will increase. Creating a hypothetical budget now and adding in a buffer will help you think about what your income in retirement needs to be, assisting you in deciding the nest egg number for your retirement savings.
Forgetting these considerations when planning for retirement could make or break how you live out your golden years. If you need help building out your retirement planning, our advisors at Mooney Lyons are happy to assist!