Financial literacy is important throughout our lives with different information needed at every stage. As we get older, ensuring that we don’t outlive our savings, and we can maintain our independence takes precedence. In honor of Financial Literacy Month, take time to educate yourself on the additional risks that come with aging.
Changes in Income, Expenses, and Savings
It’s likely that you will either reduce your work hours or retire fully at some point in your life, which means less work-related income coming in. You will have to rely more on your savings, raising the concern that you’ll outlive your money if you live longer than expected or have higher costs.
Your income could also increase as you withdraw money from retirement accounts or sell off investments to pay your bills. As a result, your taxes could increase, and you may pay more for Medicare coverage.
While work-related expenses may go down, other ones may increase depending on your lifestyle choices and health.
Taxes
You may have a lower tax bill in retirement if your income goes down. However, many retirement accounts are tax-deferred meaning that the money isn’t taxed until it is withdrawn. Once you start withdrawing, you may be hit with a higher-than-expected tax bill.
Inflation
When you’re calculating how much you need to support yourself for the rest of your life, you’ll need to factor in inflation. As prices go up, you have less purchasing power, so you’ll spend more money, reducing your savings. To keep up, you’ll need to invest some of your money, so it continues to grow.
Healthcare and Insurance
Medical expenses may increase as you get older because you are more likely to have health issues. Many people choose to purchase added coverage beyond Medicare which increases costs. Even with insurance, there are co-pays, deductibles, and other costs that should be part of your analysis of the costs of aging.
You may also need long-term care at some point. Often, these expenses are not covered by Medicare. You can self-fund, buy long-term care insurance, or consider Medicaid planning.
Housing
Moving to a more affordable location or downsizing may provide you with more cash to use in retirement. However, sometimes, money saved in one area is lost in another. For example, you may reduce your income taxes by moving to another state but pay more in real estate and sales taxes, insurance, and other costs. You may also travel more to visit family.
If you stay in your home, you may need to renovate to make your home more accessible if you have mobility issues.
Market Risks
Your investments are subject to market fluctuations that can leave you with less money when you need it the most especially if you’re forced to sell off investments in a down market. However, putting all your money in cash doesn’t allow your money to grow and keep up with inflation and other costs. You may live in retirement for 20+ years and need those gains to support you.
Cognitive Decline
Poor health is a big concern in your older years for many reasons. However, cognitive impairment poses some additional challenges. It can affect your ability to handle your money long before you realize you have a problem. Those with dementia and related diseases may forget to pay bills, overspend, end up in debt, make poor investment decisions, and fall prey to scammers and fraud.
What kind of financial knowledge do you need to address these risks? In our next blog post, we’ll discuss how to improve your financial literacy to protect your finances as you age.
