Planning for retirement is complicated because there's so much guesswork involved. It's easy to get overwhelmed trying to estimate your life expectancy and basic living expenses, and this may cause you to overlook other key factors that impact how much money you'll need.
Here are three factors that should absolutely be included in your retirement plan. If your current plan doesn't account for them, you need to make some changes.
1. Inflation
The cost of living rises over time, so what is enough to cover your living expenses today won't cover them in 10 or even five years. If you haven't factored inflation into your retirement plan, you will almost certainly end up running short in your final years.
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Inflation, like most factors influencing your retirement, is impossible to predict with accuracy. The best we can do is look at historical data and make educated guesses about the future. The standard wisdom is to assume a 3% inflation rate per year.
So if your living expenses are $40,000 this year, plan for them to be $41,200 the next year, $42,436 the next year, and so on. However, this is just an estimate. If you want to be on the safe side, consider using a 4% annual inflation rate instead to add extra cushion. Many retirement calculators already factor in inflation or allow you to set an estimated inflation rate, so you don't have to do all of this math yourself for every year of your retirement.
2. Healthcare costs
A 65-year-old couple retiring in 2018 will need an estimated $285,000 to cover their healthcare expenses in retirement, according to Fidelity, and some sources figure even higher. HealthView Services estimates a 65-year-old couple retiring today could need as much as $363,000 to cover health expenses in retirement. These figures do not include certain expenses, like long-term care or dental work. If you require these services, expect your healthcare costs to climb even higher.
Medicare will cover some of your health expenses in retirement, but there are still deductibles, premiums, and coinsurance that come out of your own pocket. Plus, there are things it doesn't cover at all, like dental work, long-term care, and hearing aids. You will have to find a way to cover these costs on your own or purchase supplemental insurance to fill in coverage gaps.
If you haven't planned for the cost of healthcare in retirement, now is the time. Consider increasing your retirement contributions to account for the extra money you will need to fund healthcare expenses. You could also open a health savings account (HSA) if your health insurance is a high-deductible health plan (HDHP). Contributions to these accounts reduce your taxable income this year, they never expire, and the money is tax-free when you use it for qualified health expenses. Those who believe they're at risk of needing long-term care should consider purchasing a long-term care insurance policy as well. And of course, you should prioritize your health at every age to reduce your healthcare expenses.