4 Expenses That Eat Away at Your Retirement Savings

US money

China is one of the biggest owners of U.S. debt. (Image: via pixabay / CC0 1.0)

Saving as much as you can is critical if you plan on living a comfortable life in retirement. But once retired, the focus should be on minimizing monthly expenses to protect your retirement savings. “If you have expenses early on in retirement, large expenses, then your portfolio balance goes down just as fast as if you had a really bad sequence of returns,” Dirk Cotton, a retirement adviser, said to The Street.

Expenses that may eat into your retirement savings

1. Healthcare costs

Medical costs are one of the biggest expenses that deplete the savings of retirees. According to estimates, an average 65-year-old adult will need anywhere from US$189,687 to US$214,565 to meet healthcare costs. This is definitely a lot of money. Thankfully, Medicare should cover some of the costs. It is probably better to choose a Medicare Advantage plan instead of traditional Medicare since the former provides wider coverage. For medical conditions not covered by Medicare, it is advisable that you buy supplemental insurance. You can lower prescription costs by opting for generic drugs wherever possible.

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2. Account fees

Retirement accounts charge annual fees for their services. Generally, such charges tend to be about 1 percent of the annual asset value. Though this seems like a small amount, it does have a significant impact on the fund. Nerdwallet conducted an analysis of how fees impacted retirement savings. They found that a 25-year-old with US$25,000 in his retirement account, adding US$10,000 every year, and planning to retire in 40 years while earning an average annual return of 7 percent, stands to lose almost US$590,000 if they pay just 1 percent in fees annually. Imagine the potential losses you could be incurring if your retirement fund is charging you higher than 1 percent. Try to negotiate and bring down the fees on your accounts as much as possible.

An annual fee of 1 percent may sound like small change, but it can add up to a significant amount over time and add to your retirement savings.
An annual fee of 1 percent may sound like small change, but it can add up to a significant amount over time. (Image: kodezign via Pixabay)

3. Taxes

Unless you are saving for retirement using Roth accounts, you will be liable to pay taxes. The amount of taxes will depend on the tax bracket for that year and the money you withdraw from the account. At the age of 70½, you will be required to take minimum distributions from the account at which time taxes will come into play. If you make withdrawals before the age of 59½, you might even be charged a penalty. Remember to factor in taxes when you plan for retirement or you will end up with lower savings than expected when you actually retire.

4. Housing costs

For senior citizens with mortgages, these can take out a big chunk of their retirement funds. Combined with the costs of upkeep and repairs, this is a significant burden. As such, you should always plan out your mortgage so that it is paid off prior to retirement. So if you are currently 25 years old and plan on retiring at 55, you should take on a 30-year mortgage.

(Image via pixabay / CC0 1.0)
Make sure to plan out your finances so that your mortgage is paid off before you retire. (Image: via Pixabay)

In case you are currently a renter, ask yourself whether you will be able to pay the rental amount during retirement. Keep in mind that rents are going to be higher 10 or 20 years down the line. Hence, you should consider the fact that retirement income may not be enough to sustain a home equal to your standard of living right now. Check in with a financial planner to find out whether taking a mortgage to buy a home or investing that amount in a retirement fund will be more beneficial to you, given your circumstances, age, and goals.

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