14 May

5 Anchor Lines The Top 4 Expenses for Retirees

Are you expecting your expenses to go down in retirement? A few, such as commuting and other work-related costs, may decrease. However, there are some costs that are likely to take an outsized bite out of your retirement income:

Home. According to the Employee Benefit Research Institute (EBRI), home and home-related expenses are the biggest spending category for older Americans, averaging 40% to 45% of their budgets.* Be aware that even if you’ve paid off your mortgage, property taxes and homeowners insurance premiums may continue to rise. Tip: Find out if your state provides property tax relief for seniors, and consider downsizing to reduce costs.

Health care. Health care costs average about 14% to 22% of household spending for individuals over age 65, with those 85+ at the higher end of the scale.* Although most Americans qualify for no-cost Medicare Part A insurance, the standard premium for Medicare Part B is $99.90 a month in 2012, and not all medical expenses are covered – you may need a Medicare Advantage plan or Medigap coverage in addition.** It is estimated that a 65-year-old couple who retired in 2011 will need $230,000 to cover health care costs throughout retirement.*** Tip: Taking care of your health today – eating right, exercising and having regular physical exams and screenings – may help keep future health costs manageable.

Long-term care. As you age, the likelihood of needing long-term care increases, and it is expensive. In 2011, the national average daily rate for a private room in a nursing home was $239.† That’s more than $87,000 a year for extended care. Tip: Look into the costs and potential benefits of long-term care insurance.

Income and capital gains taxes.†† Distributions from an employer-sponsored retirement plan, traditional individual retirement account (IRA) or annuity will be taxed at ordinary income tax rates (distributions before age 59½ may be subject to a 10% tax penalty; certain exceptions apply). Depending on your total income, you may have to pay taxes on as much as 85% of your Social Security benefits. You will also pay taxes on any realized long-term capital gains and qualified dividends. Note that, although qualified dividends are currently taxed at the more favorable capital gains tax rate, they will be taxed as ordinary income starting in 2013 unless new legislation is enacted. Tip: Having a mix of taxable and tax-advantaged investments – including potentially tax-free Roth accounts – may help you better manage your tax liability in retirement.†††

Prepare to Meet the Challenge

If you’ve already retired, take the time to review your expenses and see where you can cut costs. Talk to a tax advisor about the best way to tap your taxable and tax-advantaged accounts. If you haven’t yet retired, there’s still time to save. Consider taking maximum advantage of your employer-sponsored retirement plan – particularly if your employer offers a matching contribution – and look into supplementing your workplace plan with a traditional or Roth IRA.

* Source: Employee Benefit Research Institute, Issue Brief No. 368, February 2012, www.ebri.org.
*** Source: Centers for Medicare & Medicaid Services, www.cms.gov.
*** Source: Fidelity Investments®, www.fidelity.com.
† Source: “2011 Market Survey of Long-Tere Care,”
†† Neither this financial institution nor any of its affiliates give tax advice. Consult a tax advisor or attorney for information specific to your situation.
††† Earnings on Roth accounts may be withdrawn tax-free if the account has been held at least five years and the account holder is at least age 59½. Nonqualified withdrawals are subject to ordinary income taxes and a 10% tax penalty. Some exceptions apply.