3 Expenses That Can Eat Into Your Retirement Savings
Healthcare: The six-figure retirement-savings destroyer
The average couple who reaches 65 years old in 2018 will need about
Image source: Getty Images.
First, the
You can get around this tax hit by keeping some of your retirement savings in a Roth IRA or by making Roth 401(k) contributions if your employer offers them. Or better yet, if you're eligible to participate in a health savings account (HSA), it can help you save money on taxes both immediately and on healthcare costs in retirement.
Second, long-term care can be extremely expensive and isn't covered by Medicare. If you or your spouse end up needing care in a nursing home, it can easily cost more than
Investment fees
I recently wrote an article about how paying excessive investment fees could literally cost you a six-figure sum before you retire. And I'm not talking about massive hedge fund fees or large variable annuity commissions -- I mean the difference between mutual funds with seemingly low expenses.
One thing investors should be aware of is that actively managed mutual funds tend to come with significantly higher fees than passive index funds, yet the majority fail to beat their underlying benchmarks. For example, in 2016, two-thirds of actively managed mutual funds underperformed. So don't think that by paying higher fees you can expect better returns. More often than not, the exact opposite is true.
Here's a simplified example of how this can affect your retirement savings. Let's say that you have two investment choices -- a passive index fund with a 0.05% expense ratio and an actively managed fund with a 0.5% expense ratio (which is actually cheap for an actively managed mutual fund). We'll say that both funds achieve the same long-term investment performance of 9% per year.
In this case, a
Your children
For many people, children are a drain on retirement savings. For starters, kids are expensive -- plain and simple. For what I pay in day care costs for my two young children, I could literally afford to buy a new
Furthermore, many parents say that they may use their retirement savings to help pay for college. According to a recent
So what can you do?
Here's a quick rundown of steps you can take to plan for healthcare costs in retirement, avoid investment fees draining your savings, and better prepare for college costs:
* Save money specifically to cover healthcare costs in retirement. A health savings account is an ideal place to do this -- if you qualify for one.
* Consider buying long-term care insurance as you get close to retirement age.
* Always compare the costs of investments. This includes the funds offered by your 401(k), as well as the mutual funds and ETFs you buy in brokerage accounts.
* Make use of college-specific savings vehicles, like 529 savings plans, so you don't have to dip into your retirement savings to pay for college.
The
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "
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