Retirees who spent years saving for retirement may feel that they are financially prepared for anything. However, even the best plan can be foiled by unexpected retirement costs. Healthcare, taxes, and inflation are commonly overlooked expenses that can force lifestyle adjustments in retirement.  An effective retirement strategy addresses these three areas to help secure a retiree’s financial future and maintain a comfortable lifestyle.

Tax Impact on Retirement Income

Taxes apply even after an individual stops working.  While income may be less without a paycheck, Social Security benefits, withdrawals from certain retirement accounts, pensions, and capital gains are all subject to taxation. Additionally, in retirement, individuals may draw from multiple income sources, which can impact their tax bracket.  At age 73, retirement minimum distributions (RMDs) take effect, which can also affect a retiree’s tax bracket. Here’s a more detailed look at taxable retirement income streams.

• Social Security benefits: The Internal Revenue Service (IRS) taxes Social Security benefits based on combined income, which includes adjusted gross income (AGI), nontaxable interest, and half of an individual’s Social Security benefits. If this total exceeds $25,000 for single filers ($32,000 for married filing jointly), a portion of the benefit (up to 85%)  may be taxable. 
• Traditional IRAs and 401(k)s: Withdrawals from tax-deferred retirement accounts are taxed as ordinary income. The tax rate depends on a retiree’s income level and tax bracket. While many retirees fall into lower tax brackets than in their working years, it’s important to understand that a portion of each withdrawal goes to taxes.
• Pensions and other retirement plans: Taxes may apply to pensions depending on the state of residence.

Tax planning is one of the five tenets of a comprehensive retirement strategy. It focuses on reducing current and future tax liabilities to enhance long-term financial well-being. For example, Roth IRA holders age 59 ½ and older can benefit from tax-free growth and withdrawals. A financial advisor can help identify additional opportunities to minimize tax burden.

The Eroding Power of Inflation

Inflation reduces purchasing power, quietly compounding over time and making it harder for retirees to maintain their lifestyle. A retiree needing $50,000 today could need $100,000 in about 24 years to cover the same expenses, while facing annual inflation increases for the remainder of their lifetime.

Social Security benefits receive annual cost-of-living adjustments (COLAs). However, these increases often fall short of real-world expenses, especially when factoring in healthcare costs, which rise faster than general inflation due to medical advancements, labor costs, and an aging population. Since healthcare is a larger burden for retirees, they can feel these increases more acutely than younger groups. To preserve long-term financial stability, savings and investments should keep pace with inflation. A financial advisor can help structure a retirement plan to account for these realities.

More About Healthcare

Healthcare may be the most underestimated expense in retirement. A 65-year-old retiring in 2025 could spend $172,500 on medical care in retirement, up 4% from 2024, according to Fidelity’s Retiree Health Care Cost Estimate. That means a married couple could face $345,000 in medical costs, excluding long-term care.

While most people expect to have healthcare costs in retirement, they may not understand the complexities of Medicare coverage. Basic Medicare doesn’t cover all expenses. Most people will need supplemental coverage through other Medicare options or private insurance, and there will still be out-of-pocket costs. Here’s a brief overview of Medicare programs and what they cover.

• Medicare Part A (Hospital Insurance): Part A covers hospital bills, hospice, home health, and access to a skilled nursing institution. It also includes hospital admission (minus copays and deductibles) and skilled nursing home care for up to 100 days following a qualified hospital stay. It is free for most people who have worked (and paid taxes), a minimum of 10 years.
• Medicare Part B (Medical Insurance): Part B includes outpatient preventative care, checkups, X-rays, medical supplies, and laboratory and ambulance services. Participants pay an income-adjusted monthly premium, deductibles, and coinsurance.
• Medicare Part C (Medicare Advantage — MA): Part C offers alternative coverage for individuals enrolled in Parts A and B through Medicare-approved private health insurance companies. It may also provide coverage for prescription drugs, vision, hearing, and dental, as well as health and wellness programs. This plan, along with Medicare Part B, has a premium.
• Medicare Part D (Prescription Drug Coverage): Part D is a voluntary prescription drug plan for individuals enrolled in Parts A and B. It covers most prescription drugs and vaccines, but there are still gaps.

Long-Term Care Insurance

Long-term care stands apart from all other healthcare costs and coverage. Despite statistics from the U.S. Department of Health and Human Services suggesting 70% of Americans will need long-term care in their lifetime, the cost of long-term care can be prohibitive. In 2024, the annual cost of a private room in a nursing home is $127,750, and a home health aide is $77,792.

Long-term care insurance, health savings accounts, and other strategies can help protect wealth and ensure that retirees receive needed care. A financial advisor can estimate potential costs, compare options, and design a personalized plan that uses tax-advantaged tools and investment strategies to prepare for long-term care.

If you have not accounted for taxes, inflation, and healthcare, your retirement plan isn’t stable. Using SHP Financial’s Retirement Road Map®, an SHP advisor can help identify and manage vulnerabilities in your retirement planning. We incorporate income, tax, investment, healthcare, and legacy planning for a holistic financial strategy that allows you to feel confident in your ability to cover essential expenses while maintaining your lifestyle.  Contact us at SHP Financial today for a complimentary review of your finances.

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