When you choose to retire in Alabama, you can rest assured that you’ve made a good choice. It was recently voted the 6th best state to retire in, and is notoriously retirement friendly. But whether you’ve always lived in the Heart of Dixie, or you’re moving here to retire, there’s lots to know about in advance. And that’s more than just the weather, the beaches and the golf!
While the majority of retirement planning focuses on saving, you might not be 100% clear on exactly what it is that you need to save for. It might not be obvious what the major expenses are going to be, and how you can be sure that you’re going to be able to cover them. So if you can work with your financial advisor to discuss these well in advance, you won’t be in for any nasty surprises when the time comes.
Spending in Retirement: Healthcare
OK, let’s get the big one out of the way first. Whether they plan to retire in Alabama or elsewhere, for most of my clients – and my friends and family – being able to cover healthcare costs is one of the biggest worries they have about their retirement.
Let’s look at some figures. An average American couple who are in good health can expect to spend $285,000 on healthcare expenses in their retirement. A man will spend $135,000 and a woman will spend, on average, £150,000.
However, in part due to Medicare and other insurance programs, the percentage that healthcare takes up of total annual expenditure in retirement is actually decreasing. According to a recent study, healthcare expenses make up around 10% of a retiree’s total annual spending. In 2005 that figure was 15%.
It’s worth bearing in mind though, that these figures may indicate these expenses tend to come all at once. This sets them apart from other major expenditures which are more consistent over the years of retirement, such as food, entertainment and clothing. So you need to be able to afford to pay the healthcare bills when you’re presented with them.
How can I prepare for healthcare costs in retirement?
Knowing that healthcare costs are covered in your retirement years gives you unbeatable peace of mind, doesn’t it? There’s lots of ways to do it. These include health savings accounts which help you to save throughout your working years for health-related expenses later. You can then withdraw funds from those accounts tax-free to cover expenses like hospital stays, prescription glasses and some Medicare premiums.
Disability as well as long-term care insurance policies can also relieve you of some of the worries of future healthcare costs and are equally worth investigating.
However, if you retire in Alabama before 63 and a half, you may be in for some additional expenses as you won’t be eligible for Medicare. You’ll need to make sure you can purchase an individual insurance plan to make sure you’re covered and this could cost around $1000 a month. Keep that in focus in your budget if you plan to retire early.
In short, making sure you have adequate healthcare insurance is key to being able to cover major expenses and protect the rest of your assets. The money in your HSA is an extra buffer, and can help you to continue paying for those premiums throughout your retirement.
Spending in Retirement: Housing
Now this one is the real big expense. Whether or not you own your home outright by the time you retire, your housing is still likely to be your biggest expense in retirement. This includes all related expenses, like property tax, insurance, utilities and so on.
A study found that the average retiree in the US spends $16,723 annually on housing costs. But that figure is limited to rent/mortgage, plus taxes, insurance and maintenance and utilities are extra. So it’s a big cost to think about, and to be brutally honest, it’s a cost you just have to plan for. Besides a couple of key tips, there’s not a huge amount you can do about it.
Can I reduce my housing costs in retirement?
Yes, you can. In retirement, are you going to need as big a house as you did before? You may be empty nesters now, so do you need those bedrooms? Work pressure is lifted – do you need that home office?
And do you want to spend your retirement cleaning and maintaining a larger home than you actually need? Chances are you’d rather be on the golf course or enjoying time with your family. So consider downsizing.
If you are going to retire in Alabama, you’ll find you can get more house for your money than in other states. In fact, Alabama house prices are on average just 60% of the price of houses in Florida. So look around for a cheaper option that will fulfil your needs.
If you want to keep a larger home to entertain or for family visits, then look at ways to reduce how much it costs you to run. Use modern technology, energy-saving tools and updated insulation to lower your monthly bills. Consider low-maintenance options for your gardens.
While paying off your mortgage before you retire can ease retirement housing costs, it’s not always an option. Some people find that actually renting can reduce costs or keep them more manageable. The responsibility of maintenance costs will be removed, and you’ll know what your set costs are each month.
Spending in Retirement: Transportation
If you hadn’t thought this one would make the list of major expenses, you’re not alone. It’s a cost many of us forget. A study by the EBRI found that for younger retirees, transportation costs were the second highest expense in retirement, behind housing. That’s right – more than healthcare, and more than food.
As you age, it will remain a significant expense and over the duration of your retirement, you’re likely to spend as much on transport as on your health. It’s really expensive to maintain a car and pay for all its associated costs. Then, when you stop driving, the alternatives aren’t cheap either.
Can I reduce transportation costs in retirement?
Having a car will cost you around $2,282 a year with the majority of that being spent on gasoline, insurance and repairs. But is your car costing you too much? If it is, you may well save money over the long term by buying a newer, more reliable car. AARP have an auto buying program, to assist seniors with getting a better vehicle.
AARP also have an online course you can take which can help you save money on your insurance.
Spending in Retirement: Taxes
When you retire in Alabama, you’re in luck when it comes to taxes. Taxes are meaningfully lower in Alabama, making it a really tax-friendly place to retire. Social Security and pensions are exempt from Alabama taxes, and you’ll receive a deduction for federal taxes paid. You will still have to pay taxes on IRA and 401k distributions, property taxes and sales taxes.
Can I reduce my tax bills if I retire in Alabama?
If you’ve always lived in Alabama or are coming here to retire, there are ways to reduce your tax bill. Just moving to Alabama from other states will see a reduction in your tax bill, as it’s notably cheaper than many other states, including the nearby North Carolina and Missouri.
Then within Alabama, the range of property taxes and fuel tax means that some areas within the state are even cheaper.
But really, the best way to reduce your tax bill is to employ the help of professionals early on in your retirement planning process. Figuring out exactly when to make Roth conversions, when to start taking Social Security payments and when to take IRA distributions are all hugely important factors in working out a multi-year tax plan.
The overall goal will be to reduce what you pay over your entire retirement, rather than on a yearly basis. This can also be affected by lump sum payouts from pension plans, returns on your portfolio as well as other types of capital gains. Engaging the experts is the best way to reduce your tax bills over the long term.
Cover All Major Expenses When You Retire In Alabama
Retirement expenses can be costly, and income is limited. You need to know that you’ll have all the bases covered when you retire. Factoring in transportation costs, a multi-year tax plan, healthcare costs and housing expenses are a vital part of any robust retirement plan.
It can feel difficult to get all the pieces into place. If you need help compartmentalizing your retirement plan to make sure everything’s covered, then get in touch. This is what we do, and I love to see the peace of mind that a strong, comprehensive plan gives my clients. I look forward to talking to you and helping you to get all those major retirement expenses taken care of.