Running the Numbers: How We Help Cooke Clients Plan for Their Top 5 Retirement Expenses

Myth: When I retire, I won't have any excess expenses beyond my regular groceries and monthly bills.

Truth: You'll keep paying almost everything you do now, and you’ll want to consider what you want retirement to look like. What are your goals; goals around health, travel, and family? It's time to be prepared.

Expenses may keep climbing even after income declines in retirement. That's especially true now that most Americans are living longer, healthier lives. Adding more years lets you serve more, give better, and enjoy life longer. At the same time, a longer life span makes it imperative to identify and manage your top retirement expenses.

We asked a wide range of retired Cooke clients what was costing them the most in retirement. 

Here's what they had to say:

Healthcare 

Growing older is not for the faint of heart — literally or metaphorically. Not surprisingly healthcare makes the list of top expenses (and concerns) for most retired adults. As time goes on, retired men and women face increasingly complex and expensive health conditions.

Medicare covers many medical expenses, but not all of them. Many retired Americans may face unpleasant surprises when their doctor’s bill arrives. That's why it's important to prepare now.

At Cooke, the majority of our clients say their health concerns focus on one of these areas: health emergencies, managing chronic conditions, or long term care.

People in the first decade of retirement generally worry most about health emergencies. The unexpected accident, broken bones and aging related fractures, or even dental disasters can require months of expensive therapy, prosthetic devices, or extra help at home — all of which you may have to pay for. 

Chronic conditions also crop up more frequently as people age. Taking care of diabetes, high blood pressure, or arthritis, for example, can get challenging and expensive. And of course, older adults are not immune from mental health challenges. Depression, alcoholism, and anxiety can require treatment that Medicare may not cover. It's vital not to brush over this treatment, though, since the suicide rate for men over 85 outstrips all other age groups by 400%.

Then there's long term care. According to the AARP, 52% of the people turning 65 today will need long term care at some point. Across the US, the average cost for long term care for a person with dementia totals up to $341,840. While no one wants to think about the possibility of Alzheimer's or another form of dementia, planning ahead is the responsible and loving thing to do for your family and friends.

Taxes

Just because you’re retired doesn’t mean you stop paying taxes. 

The government doesn't stop assessing taxes, not even if you're 165 years old. Even if you've tried to plan carefully to minimize your tax burden in your retirement years, you'll want to review everything regularly with a trusted advisor. As tax laws change new opportunities may arise, or even more importantly, receiving a nasty surprise letter from the IRS is no way to enjoy your best years.

What does your post-retirement tax situation look like? If you're like most working professionals who invest for the future, you've put money in an employer retirement plan (such as a 401(k), 403(b), or deferred comp. plan, a traditional IRA, a Roth IRA, and/or a taxable investment account. While all of these vehicles may provide similar investment opportunities, the tax benefits vary among them. Let's look at each:

Named after the part of the IRS code that discusses retirement plans, a 401(k) is an employer-sponsored tax plan. You probably knew that already, didn't you? What you might not have known, however, is that it's the instrument responsible for much of America's personal wealth. Most millionaires store their wealth in a 401(k).

A 401(k), similar to a 403(b) if you worked at a nonprofit or a 457(b) if you worked for a state or local government, usually comes with a high contribution limit, an employer match, and a tax break for the year you contribute. Taxes on the money contributed are deferred until you take the money out of the account. That said, you must start taking required minimum distributions (RMDs) at 72 (if you have terminated employment) or Uncle Sam will penalize you.

A traditional IRA works similar to a 401k, and your money is tax-deferred. A Roth IRA, however, allows for tax-free growth: you won't owe any taxes on the money you withdraw after you're 59 1/2, and there are no RMDs. It's important to keep in mind that both these IRA types have relatively low contribution limits.

Taxable investment accounts are not considered formal retirement accounts. There are no contribution limits, You simply invest in mutual funds, stocks, bonds, or real estate ventures, then have the flexibility to withdraw the money whenever you need it. You’ll be taxed on the growth, or gains, within the account, but the IRS does provide preferential treatment (in most cases a reduced tax rate) on long-term capital gains.

So, what's the most efficient and effective way to invest for your retirement? A Roth? A 401(k)? Traditional IRA? Or a taxable account?

Yes! All of the above are good options for retirement planning.

Roth IRAs can be especially appealing, but we believe you benefit the most when you have money growing in all these pots. This varied approach gives you taxable and tax-free withdrawal options during retirement.

Travel

They don't call ages 65-75 the Go-Go Years for nothing! According to the AARP, 99% of Boomers were planning to take at least one trip a year pre-COVID. While the pandemic has certainly halted many plans and required rerouting others, retirees are still getting bitten by the travel bug.

All that time once spent in an office can now be spent with sand between your toes and sunshine above your head. Even better, you might look to volunteer your talents and expertise with a ministry in a place you've always wanted to serve. Many retired adults are creating new, rich lives finding ways to serve God within their communities, families, and national or even global ministries.

You don't have to be wealthy to do it. People of nearly all income levels name travel as a bucket list goal during retirement. For many people, both travel and mission opportunities are growing more and more affordable. However…

If you dream of traveling to exotic places or introducing your grandchildren to the world, you need to start planning now. Travel may widen your perspective, but it will narrow your bank account if you aren't watching out. The good news is that a clear strategy executed now can keep things like travel from eating into your long term finances.

Whatever your travel goals look like for retirement, you need to plan for the difference in income pre and post-retirement.

Lifestyle

Life doesn't stop when your career ends. At least it shouldn’t! You will likely still pay housing costs, need to replace an automobile, and continue to enjoy dining out or other entertainment. 

The Federal Reserve’s Survey of Consumer Finances revealed that 37.6% of households headed by people aged 65-74 had a mortgage on their primary residence in 2019. For those 75 or older, the number dropped slightly to 27.7%.

It’s hard not to argue, that almost everyone would benefit from a mortgage-free retirement. Your tax benefits will likely be negligible and your risks during retirement increase with mortgage debt. But for many people, a mortgage in retirement is a fact of life.

If you do pay off your house, though, you may still need to plan for expenses for remodeling or maintenance. Even downsizing may come at a cost since small, low-maintenance homes can command surprisingly robust prices.

Many people drive at least one or two decades after retirement. Since the average person keeps a car for 79 months, and the average car loan runs 66-68 months, that means for some car payments won't stop. So when it comes to owning a car in retirement, consider keeping the car you have, or maintain and plan to have the cash on hand to buy another one outright.

Of course, retirement is a great time to enjoy more of the money you worked hard to earn and save throughout your working life. Planning for trips, dinners out, nights at the theatre, and gifts of your time and resources can help provide a sense of meaning during your retirement. 

As you think about your lifestyle, consider creating a retirement spending plan. At Cooke, we believe one of the most important steps to take as you prepare for retirement might involve breaking out travel and living expenses so you can plan accordingly.

Helping Family, Without Hurting

Do you plan to help support grown children or grandchildren? If so, how far do you plan for your assistance to go? You want to help when and where needed. But you likely don't want to create an incentive not to work or a reason for a loved one to purchase something they can't afford. The bible reminds us that we do have a responsibility to protect and provide for our families, but that might not necessarily mean providing for their current lifestyle. We don’t want to get in the way of God’s plan or transfer trust from God to us. As financial stewards, consider and pray on the spiritual impact, financial responsibility, and financial need.

Many of our clients say they plan to help cover higher education costs for their grandchildren. Others enjoy footing the bill for memorable family vacations. They want to "get all the kids together" and forge family time. These are wonderful ideas!

Whatever your expectations, be clear about them with your family. Have clear conversations with others involved about what you want to do, how, and why. For example, if you plan to help with your grandchildren's college, let their parents know and you’ll likely want to have a discussion with your advisor on how to do so without hurting their chances for any financial aid or college scholarships.

Do your grown children who may need care after you pass? It's best to discuss this situation with your attorney and your financial advisor early in the retirement planning process.

In conclusion, retirement can seem daunting, even expensive. With careful planning, however, you can help ensure that you live a comfortable life, share your time and treasure with those in need, and leave a legacy for generations yet to come.