Housing is often the largest cost in retirement, which makes it a good place to start when considering what moves to make when trying to reduce retirement expenses. If you’re able to pay off your mortgage before retirement that will be one monthly expense you can eliminate. If you’re hoping to also reduce the cost of taxes, insurance and maintenance, downsizing might be a good option too. With this, you’ll also save money on utilities and expenses related to living in certain parts of a city like increased taxes and homeowner’s association (HOA) fees. As mentioned before, moving to a state without income tax such as Tennessee, Florida and Texas is another way to save.
When making a withdrawal from traditional 401(k)s and IRAs, you’ll be expected to pay income tax on each one. If your retirement income is over a certain amount, part of your Social Security benefit might also be taxed. With the help of tax strategies, you can minimize what the government takes from you. These strategies include moving to a state that doesn’t charge income tax, delaying receipt of benefits until age 70 and reassessing your investment holdings.
The estimated cost of healthcare during retirement is $130,000 for a man, $146,000 for a woman or $325,000 for a 65-year-old couple according to the 2021 Employee Benefits Research Institute‡ Retirement Confidence survey. Once you’ve reached your Medicare Part B deductible ($203 for 2021), you’ll pay 20% of the Medicare-approved amount for most of the medical services you use. You can try to offset this by purchasing another insurance plan to help with traditional Medicare. While there are a few preventative care services that Medicare will cover without out-of-pocket costs, some common medical needs such as hearing aids or eyeglasses are not covered. A smart way to save for these and overall healthcare expenses is through a health savings account (HSA).
It may seem surprising, but it’s important for retirees to have a separate amount of saved money within their savings account to help protect the income you’ll live on during retirement. Unexpected costs including health expenses and family emergencies may come up and reduce your monthly income—and you won’t be able to make that money back on a fixed income unless you go back to work. Another reason is that an emergency fund can take the stress off your finances should your retirement account experience a down market. The supplement income will provide potentially critical support while the market recovers.
If you are ready to start preparing for the golden years of life, contact a financial advisor to review your financial plan and walk you through your options for retirement.
Optimize your retirement by learning about savings plans, estate planning and wealth transfer in the Preparing for Retirement playlist on the UMB Financial Education Center.
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1All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state’s tax laws to determine the tax treatment of HSA contributions or consult your tax adviser. Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice. Withdrawals for non-qualified expenses are subject to income taxes and a possible additional 20% penalty, if you’re under age 65.
Investments in securities through HSA investment account are: Not FDIC Insured • May Lose Value • No Bank Guarantee