Preparing for Retirement Part Three: Spending

25 Aug

Preparing for Retirement Part Three: Spending

What You Really Need to Know

There are events in our lives that we can accurately call momentous. Marrying, having children, buying a home, changing careers—all of these and many others, including retirement, qualify. Preparing for these life changes should involve creating a spending plan.

You may have already estimated your income in retirement, likely somewhere between 70% and 100% of your working income depending upon your own situation. How can you use your money wisely, so that it can last throughout your lifetime, perhaps 20 or even 30+ years?

Today, retirees can confidently assume that health care will be one of the largest line items on their retirement budget. According to research from Fidelity Investments, a healthy 65-year-old couple can expect to spend about $250,000 in retirement on health care-related expenses alone. Although you will likely be covered by Medicare, it does not pay for many of the medical expenses you may face.

Medical Costs

Medicare Part A, for which most people don’t pay a premium, covers hospitalization. Part B is optional coverage for doctor services and outpatient care. In 2016, the Part B premium is about $120 per month for most people, depending upon income. Even if you have coverage under Parts A and B, though, you will have out-of-pocket medical costs.

Medicare Supplement plans are designed to pay health care costs not covered by Medicare. These plans are purchased through private insurers. They can be expensive, but will limit your out-of-pocket costs. Part C Medicare Advantage plans, also offered through private insurance companies, are designed to replace Parts A and B at a reasonable cost. These plans may also include prescription drug coverage.

Long-term Care

Neither Medicare nor health insurance plans pay for long-term care, which is custodial care when someone needs help with the Activities of Daily Living. This is different than skilled nursing, which is temporary care, usually related to recovering from an illness or injury.

Your chances of needing long-term care at some point in your life are significant. The MetLife Mature Market Institute reported that, as of 2012, the average stay in a nursing home was 2.4 years, at a national average cost of $80,000 – $90,000 per year. With these figures, it is easy to see how quickly retirement savings could dwindle when long-term care is necessary. That’s why your own and your spouse’s potential long-term care needs should be part of your spending plan.

Pay Down Your Debts

As you get closer to retirement and begin the planning process, be sure to consider your spending plan. Resolve today to pay off your debts, especially any revolving debt you may have. Strive to reduce (or eliminate) your mortgage, car payments and other optional expenses. Then, as you see extra money in today’s budget, increase your contributions to your workplace retirement plan. Speak with a financial professional to decide on a sensible investing strategy that can help your account grow without undue investment risk. Make your plan and stick to it. By following these steps, you can help protect your money today, and on into retirement.