Dealing with Unexpected or Unanticipated Expenses During Retirement
Taxes have been a constant, for example sales tax, property tax, income tax, and more. Most Americans have managed to handle taxes without becoming intimately involved. This is very likely to change during retirement. Tax laws on each cash disbursement may differ and you are responsible for knowing all about them. Like it or not, you will have to plan for these in advance to pay Uncle Sam only what you legally owe him, and nothing extra. Once you retire, you will have various forms of income and likely will have to pay your fair share in taxes. Tax planning is essential as you prepare for retirement, and help is readily available. Paying a tax accountant or an attorney could be far less expensive than making a tax mistake.
Why can taxes be higher after retirement? If you have done your job well and have plenty of income for retirement, that extra income can mean more taxes. The more money you have in a traditional IRA and other retirement accounts, the more you will have to withdraw and pay taxes on when you reach the age of 70-1/2. Taxes are often higher because your income can actually go up and you will likely have fewer deductions.
The reason it is important to consider taxes is that if your tax bill is higher after retirement, you may not have enough to do all the activities that you had planned on. When figuring retirement income, it is essential that tax planning is included so that you are not short. Retirement account disbursements begin at 70-1/2 and you will have to pay tax on those amounts.
Deductions are usually decreased because many retirees have paid off their mortgage. Most do not have kids at home. If you are no longer working, it is less likely that you are still contributing to your retirement fund. Because of these decreased deductions, your tax bill can actually increase even though your income has stayed the same.
The fact remains that even when you are retired, the U.S. Government collects taxes on what it terms "taxable" income.
Taxable Income includes the following.
- Earned income.
- Unearned income (dividends, interest, and so on).
- Self-employed income.
- Partnership income.
- Real estate rental income.
- Income from royalties, trusts, and estates.
- IRA income.
- Unemployment income.
- Gambling winnings.
- Some Social Security Income (special cases).
- Tax refunds, if deducted previously.
- Other income as established in the U.S. Tax Code.
This is another expense that is likely to increase during retirement. Sometimes this occurs because the benefits seem so appealing and you are determined to be prepared for anything that comes your way. The idea behind insurance is simple. Get a large number of people to put small amounts of money in a common pool against the possibility that something bad will happen. The few who need it collect on it. Those who do not need it are told how lucky they are that they did not need the insurance coverage.
A huge amount of trust is put into an insurance company because we expect them to manage that money properly. Seek out companies with top of the industry financial ratings.
Insurance can be a very smart decision, however, be judicious in your purchases. All insurance purchases must be evaluated for two things 1) Actual need, and 2) Type and the amount actually needed. The insurance industry plays on people's emotions. Notice the number of commercials on television pulling at your heartstrings about whether you will leave your loved ones provided for upon your death. Try to set emotions aside when considering insurance purchases. Evaluate if the risk elimination is worth the premium you have to pay. If so, then shop for the best deal. Most insurance companies have plenty of competition, so take your time, and make a wise purchase.
Of all possible insurance needs the following are the most typical that you may need in retirement.
Health. Leaving your place of employment often means that you also leave behind your health insurance. Since the passage of COBRA, the Consolidated Omnibus Budget Reconciliation Act, it is now mandatory for employers to allow their departing employees to continue their health care coverage. The financial responsibility is now on the former employee, but this can help with the transition from working to retirement, especially if a pre-existing health condition exists. Medicare is a retirement option, and you have three choices, 1) Original Medicare, 2) Original Medicare plus a supplementary insurance that will help to cover any gaps, or 3) Medicare managed care plan. Medicare is a good program, but you absolutely must know what it covers and when. Do not get caught by surprise. You may consider non-Medicare options either because you do not wish for Medicare coverage, or because you are not eligible for it. Shop around for health insurance and read all the fine print.
Long Term Care. Annual care in a nursing home is $60,000 and rising. You have a few options to handle this possibility. First is to stay healthy and simply hope for the best. Your best bet is to evaluate your family history, your own personal health, and the lifestyle choices that you have made. How determined are you about staying healthy and active? If you really intend to stay independent and healthy, your likelihood is good that you will. Your other alternative is to apply for Medicaid, but you have to have spent most of your assets and your spouse is really left with very little for this to happen. Medicaid is not a terribly attractive option, and is considered by some to be a state welfare option for the destitute. Your last option is to shop around for long term insurance care that will cover some of the costs of a nursing home, should that become necessary. As with all policies, long term care policies are varied in what they will cover and what they cost. As with all insurance, shop around for the best rate and the best coverage before making a purchase.
Life. This is the most commonly touted and advertised insurance for retirees, and strangely, it is less and less needed as we age. When you were working and largely responsible for the needs of a growing family, life insurance was a necessary expense. If most of your income comes from your invested assets, and will be transferred to your surviving spouse, then life insurance is less likely to be needed. Do you have a life insurance policy gathering dust in that old safe deposit box? If so, then you should have it professionally reviewed as to its purpose and cost. This, again, is an individual need and one that only you can determine.
Disability. As with life insurance, if most of your retirement income is in the form of asset disbursements and not from a salary, then the idea of disability insurance is moot. However, if you are still working and relying on your income to maintain your retirement account for your "old" age, then disability insurance could be a wise choice. Over the age of 65, disability insurance is usually unnecessary. Up until that point, determine your needs.
Homeowners. Because your home is still likely your single largest asset, homeowner's insurance is a good idea. Be sure that you insure for one hundred percent of the replacement value and not for what you paid for it. Homes increase in value and if you are insured for only what you paid, the original price, you could be out hundreds of thousands of dollars.
Auto. Unless you are no longer driving, you MUST carry auto insurance. Now, if you are driving an old car that has nearly no value, then you can cancel or dramatically reduce portions of your insurance such as collision and comprehensive. If you are driving a very expensive car, then insure appropriately. Other ways to decrease how much you pay in insurance is to increase your deductible. Be sure to ask for discounts that may be due because of your age, and how long you have been with a company.
Umbrella. Do you have jewelry, antiques, artwork, guns, or more? Most of these will not be covered by your regular homeowner's policy and you will be required to have an independent appraisal of all such items and insure appropriately. Umbrella policies also handle the issues of a personal injury occurring on your property. Talk with your insurance agent about just what is, and what is not covered with each policy.
Just how much you will need is still up in the air. You can consult a financial advisor, and see what inflation rates have been recently, but that will truly only give you an approximation. You can keep track yourself over the years by what you typically pay for standard items, gas, milk, electricity, and so forth and establish your own general chart. This is really only for your information, just be sure to consider inflation when you make your retirement plans.
End of Life Issues. Living wills, holographic wills, powers of attorney, and so on. As you approach the age of retirement, you do need to consider just what you want to happen, not only to your money, but also to you. If you are seriously injured, how do you want to be treated? Do you want everything possible to be done to resuscitate you? Do you wish, instead, to have no heroic efforts expended?
Have you talked about these issues with your spouse? With your family? It is essential that you discuss these issues, have someone who has been granted power-of-attorney to handle these issues to avoid conflict during an emotional and personal crisis.
Working During Retirement
While this might seem like a strange topic to be discussing for a retiree, there are quite a number of people who retire from their "job" and look forward to the new phase in their life. After retirement is when they are finally able to do what they have always wanted to do. They spend the majority of their lives in a job that they really did not care about, and once they are able to retire, they find that they are free to finally pursue a burning passion that has been lying deep inside of them.
Most people who work after retirement do so because they enjoy the work they are doing, not because they really need to add to their retirement. The idea behind retirement is to expect to live a long time and to have enough money to live a long time, and the likelihood is that you really will live a long time. A huge question arises, and that is to consider what will you do to fill in all those hours and years? When you work after retirement, it is usually because you really want to, and you are more in control of your time.
Reasons for working include those listed below.
· Money. It usually comes in handy.
· Relief from boredom. After all, there really is only so much golfing one can do!
· Meaning and purpose. With purpose, people tend to live better and live longer.
· Social Interaction. Once retirement becomes a reality, our social life can become severely restricted. By working, we are exposing ourselves to new people, keeping us alive and active by bonding with them.
Starting a Business. This is a serious consideration for a number of retirees. Given that the average length of retirement can reach up to twenty years, that is certainly long enough for a business to become established.
Starting a business is not an easy task, and it would be wise to think seriously before starting down this path. After all, you might enjoy gardening, and know a lot about plants. However, if you have never worked in a nursery, and have never worried about stock, personnel, and employment laws, you could be in for a big surprise.
Moreover, if you are truly blessed with an entrepreneurial spirit, and have a realistic view of what you plan to do, then by all means do it. Be sure that you have considered all the financial ramifications of starting a business so that you do not jeopardize your personal retirement fund.
There are actually quite a number of businesses that can be started without huge investments. In fact, more and more retirees are beginning to step into this arena because they have a great deal of knowledge and training that would otherwise go unused.
Only you will know if you are cut out for running your own business. However, if you have always dreamed of owning your own business, then, at the very least, look into it. If you have to, work with someone else for a time to make sure that you really like the day in and day out details of running a business.
Having your own business can affect your other retirement, but it will not affect your Social Security unless you draw a salary that exceeds the income limitations. Usually being a business owner, you can avoid such a result by paying close attention to legitimate business deductions.
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