The Top 4 Expenses for Retirees

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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: California may offer some limited opportunities for seniors to reduce their property taxes through Propositions 60 and 90. Visit the California State Board of Equalization to learn more. You may also consider downsizing to reduce costs. If you relocated, find out if your state provides property tax relief for seniors.

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.* It is estimated that a 65-year-old couple retiring in 2012 with no employer-provided health care coverage will need $240,000 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; $301 in California.† That’s $87,000 to $109,865 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 your 403(b) or 457 plan, traditional individual retirement account (IRA) or annuity will be taxed at ordinary income tax rates (distributions before age 59½ in 403(b) plans 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, if you even qualify for any 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. Considering taking maximum advantage of your district’s 403(b) or 457 plan to supplement your CalSTRS or CalPERS benefit.

* Source: Employee Benefit Research Institute, Issue Brief No. 368, February 2012, www.ebri.org.

** Source: Fidelity Investments®, www.fidelity.com.

† Source: “2011 Market Survey of Long-Term Care,” MetLife Mature Market Institute®, www.metlife.com/mmi.

†† Neither California Teachers Association 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.

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Source: Employee Benefit Research Institute, Issue Brief No. 368, February 2012, www.ebri.org.