It’s no secret that retirement is expensive. According to the Bureau of Labor Statistics, an average American adult aged 65 and over spends about $ 46,000 a year, and after a few decades of retirement, you could easily spend hundreds of thousands of dollars.
However, there are some costs you may not be factoring in that could make retirement even more expensive. And if you ignore these hidden costs, your savings might not last as long as you think.
1. High 401 (k) fees
Even if you don’t realize it, you pay a fee on your 401 (k) investments. Every retirement account charges a fee, but some plans have higher fees than others.
The average 401 (k) plan charges an annual commission of 1% of assets under management, according to a report from the Center for American Progress. So, for example, if you have $ 100,000 in your 401 (k), you will pay $ 1,000 per year in fees.
It may not seem like a lot, but when your money has been invested for decades, those fees add up. According to the Center for American Progress, the average worker paying a 1% annual 401 (k) fee will pay over $ 138,000 in fees just over a lifetime. But if your annual fees increased just 1.3% per year, you would end up spending over $ 166,000 in fees over a lifetime.
To see how much you are paying in fees, check your plan statements or talk to your plan administrator. If you find that you are paying higher than average fees, you could save thousands of dollars by switching to a different type of retirement account.
2. Costs of long-term care
Nearly three-quarters of seniors will eventually need long-term care, according to the US Department of Health and Human Services. If you are lucky, you may be able to count on those close to you to take care of you as you get older. But not everyone has this privilege, and long-term care comes at a high price.
The average semi-private room in a nursing home will set you back over $ 82,000 per year, according to the Department of Health and Human Services, and Medicare generally won’t cover long-term care. So, if you don’t prepare for this expense, you might get a costly surprise.
One way to reduce your personal expenses is to purchase long term care insurance. While the premiums can be high, the earlier you enroll, the less you’ll pay each year. And high premiums may still be better than paying tens or even hundreds of thousands of dollars in long-term care costs.
3. Retirement taxes
Taxes don’t go away once you leave the workforce, and you may have to pay taxes on withdrawals from your retirement account as well as your Social Security benefits.
Withdrawals from a 401 (k) or traditional IRA will be subject to income tax. Additionally, you will need to start taking the Minimum Required Distributions (RMDs) from these types of accounts once you turn 72, even if you are still working at that age. If you do not take your RMD, you will be fined 50% of the amount you were required to withdraw.
Your Social Security benefits cannot escape tax either, and the amount you owe will depend on what is called your “combined income”. Your combined income is half of your annual benefit amount plus your adjusted gross income, and if it is more than $ 25,000 per year (or $ 32,000 per year for married couples filing jointly), you will owe taxes on the amount. minus a portion of your benefits.
Don’t let these hidden costs derail your retirement
Planning for retirement is difficult, especially when you consider the number of expenses you’ll need to prepare for. But the more you are able to predict both expected and unforeseen costs, the better off you will be in retirement.
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