02/2020 KIPLINGER’S PERSONAL FINANCE 49ticket items. “Even new tires can bust
a budget,” she says.- Expect changes in
expenses as you age
During their go-go years, many re-
tirees spend as much as they did be-
fore they retired, if not more. But once
they reach their mid seventies (this
will vary, of course, depending on
health), many hit what Michael Stein
refers to as the “slo-go” years—they’re
less active, which means they spend
less, and may downsize to a condo or
smaller home. Retirees spend less on
food as they grow older, too, according
benefits. See our state-by state guide
to taxes on retirees at kiplinger.com/
links/retireetaxmap for a rundown
on your state’s taxes (or a state you’re
considering moving to in retirement).
If, like most preretirees, you have
a combination of taxable and tax-
deferred accounts, it’s worth sitting
down with a financial planner or tax
professional to discuss the most tax-
efficient way to withdraw money from
your various accounts. A tax pro can
also help you come up with a realistic
estimate of your federal, state and lo-
cal tax bill.- Adjust for inflation
Many people have grown accustomed
to low inf lation over the past decade,
but that could change. And even if
the overall inf lation rate remains low,
health care expenses have historically
risen much faster than the rate of in-
f lation. When calculating cost of living,
Pearson uses a 2% inf lation rate for
ordinary expenses but bumps it up to
10%—or even higher—for health care
costs. Similarly, if you’ve purchased
long-term-care insurance, you can
expect your premiums to rise at a rate
faster than inf lation; some insurers
have hiked premiums on policies pur-
chased before 2005 by 50% or more.
Insurers have done a better job of
pricing more recent policies, but it’s
prudent to plan for an increase of
about 20% every 10 years. - Don’t forget an
emergency fund
Numerous studies have shown that
Americans fall short when it comes
to putting aside money for emergen-
cies. But keeping a well-funded rainy-
day account is even more important
once you retire, because you usually
can’t put in overtime (or ask the boss
for a raise) to pay for major car repairs
or a new roof. Bobbie Munroe, a CFP
in Havana, Fla., advises her clients
to put aside $200 to $300 a month,
ideally in a separate account, for big-
example, you can claim an additional
$1,300 for your standard deduction in
2020 ($2,600 if you and your spouse
are both 65 or older and file jointly)
or an additional $1,650 if you’re un-
married and not a surviving spouse.
But if you factor in a precipitous drop
in your tax bill, your budget could fall
short. All of the pretax money you’ve
dutifully socked away in traditional
IRAs and 401(k) plans will be taxed
at your ordinary income tax rate when
you take it out. Most pensions are also
funded with pretax income, so you’ll
pay taxes on that money at ordinary
income tax rates, too, when you get
your payments. Depending on your
other income, a portion of your Social
Security benefits may be taxed as
well. And don’t forget about state
taxes. Some states exclude some or all
of your retirement income from taxes
(or have no income tax), but others tax
everything, including Social Security
KipTipThe Deferred
Annuity Safety Net
Long-term-care insurance offers a way to
avoid catastrophic expenses later in life. But
if you’re already in your sixties, you may have
a hard time finding a policy that’s affordable.
One alternative that could provide income for
late-life care is a deferred annuity, which pro-
vides guaranteed payments when you reach
a certain age. Because of the risk that you’ll
die before you start collecting payouts, these
annuities cost much less than immediate
annuities.
For example, a 65-year-old man who
invests $100,000 in an immediate annuity
would receive $525 a month, according to
Immediateannuities.com. But if he invested
$100,000 in a deferred annuity that starts
payments when he turns 80, he would receive
about $1,750 a month. Deferred annuity pay-
outs, like immediate annuity payouts, are tied
to interest rates, so if you believe rates are
going to rise, you may want to postpone
investing.
You can invest up to 25% of your IRA or
401(k) plan (or $135,000, whichever is less)
in a deferred-income annuity without having
to take required minimum distributions on
that money when you turn 70½.