This is a guest post by Danielle Kunkle Roberts. She is the co-founder of Boomer Benefits where she and her team help baby boomers navigate their Medicare insurance options. She is a member of the Forbes Finance Council and writes frequently about Medicare, retirement and personal finance.
Dreaming of retirement day is something that nearly everyone indulges in now and then. We plan for all the things that we never have time for now, such as travel and exercise and hobbies. If you want to truly enjoy those future activities during your golden years, it’s important to prepare now and make good choices.
Here are some of the mistakes that people often make and how you can avoid them:
Failure to Develop a Plan
Few people ever sit down to outline how much money they will need to meet their monthly expenses in retirement. This number, of course, is different for everyone so there is no one buy you who can really make a plan that will actually work.
Make a list of your expenses and estimate how many of them you expect to still have in retirement. Many retirees spend more in retirement than they originally estimated because some expenses don’t just go away simply because you have retired.
Take a look at the monthly expenditures you have now and multiply them by 80%. This is a good ballpark figure on how much you’ll need each month to live on in retirement
Counting on Social Security
While Social Security serves its purpose of being a safety net, it certainly is not enough money to even come close to living on. The average Social Security check is less than $1400/month, and some of this will be spent on Medicare Part B and D premiums as well.
All too often people assume that Social Security will be more than what they end up being. So, every year you should check your Social Security earnings record. Make sure that it lists out your income for every working year and that no years were missed. Review the estimated amount of your future benefit check and then include that in your financial planning but as only a part of your income.
You need to have enough money invested in a 401K or IRA to go alongside that Social Security income.
Thinking Medicare is Free
Because Medicare is a national health insurance program, many people tend to assume that it’s free. This is certainly not the case. You pay taxes during your working years that help to pre-pay for your future hospital benefits under Medicare Part A.
However, Medicare Parts B and D have monthly premiums associated with them. The standard base premium for Part B in 2019 is $135.50/month. This will be deducted from your Social Security check once you start taking income benefits. If you file for Medicare before you begin taking income benefits, then you will be billed quarterly for Part B.
People with incomes higher than $85,000 as an individual or $170,000 as a married couple will pay considerably more money for Medicare Part B based on their MAGI (modified adjusted gross income). This is extremely important that you estimate ahead of time because if you are budgeting that for approximately $135/month for Part B and then find out later that based on your income you own three times that much, you could find yourself short of funds in retirement.
One easy way to save for medical expenses in retirement is with a health savings account. If your employer offers a high-deductible health plan, chances are that it will qualify you to open a health savings account. You can contribute money into this account every year to save for your future healthcare costs in retirement.
Contributions are tax-deductible and grow over time, earning interest and compounding. When you later turn 65, you can use funds saved up in your HSA to pay for Medicare premiums as well as deductibles, coinsurance, and copays. You can even withdraw money post-65 without penalty for non-medical expenses – you would just pay ordinary income tax.
Consider investing in a health savings account as a separate pool of money which you have set aside in your mind to be used for healthcare expenses.
Not Planning for Long Term Care
Another expense many fail to plan for is long-term care. Insurance industry giants estimate that 1 in every 2 people will eventually need long-term care. While Medicare pays for medical expenses in retirement, it does not pay for your stay in an assisted living facility or nursing home.
This is an expense which you will pay for privately and it is tremendously expensive – thousands of dollars each month. Failure to plan for this can result in you having to spend down all of your assets and then on Medicaid to pay for your care. This is never a fun situation as you have little control over which facility in your state that you will be sent to.
Saving for long-term care expenses ahead of time is important. You might consider purchasing a long-term care insurance policy which will help to pay for the costs of custodial in-home care, assisted living home care or even nursing home care.
The best way to avoid financial stress and worry during retirement is to plan ahead and account for all potential costs. Consider a session with a financial planner to help you think through all the scenarios and set a goal for yourself. Someday you’ll be glad you did.