If you’ve faithfully set aside money for retirement over the years, it pays to sit down and review your finances before you leave your job. You may be surprised to see your budget drained by fees, including service and management fees tied to your retirement accounts.
“It is amazing how much some of these charges can deplete one’s retirement nest egg over the course of 20 to 40 years,” says Gary Scheer, founder of Retirement Financial Advisors in Morristown, New Jersey. Add in subtle fees that arise in this stage of life, and your overall savings could take a hard hit. Here are some of the common hidden fees to be aware of during retirement, and how to manage them.
Annuity fees. When you purchase an annuity, the salesperson involved will receive a commission. Also expect to pay for underwriting and management expenses. “Whether fixed or variable, annuities are known to have higher fees than your typical mutual funds that you invest in due to the guarantees they provide to your principal balance as well as your guaranteed growth,” says Kalen Omo, a personal financial coach in Tucson, Arizona. These guarantees often ensure you won’t lose your principal balance and will receive a set return on investment every year.
Another unforeseen expense can occur if the market performs better than the rate of return you are receiving. For instance, if you have an annuity with a guaranteed return on investment of 6 percent, and the stock market earns 21 percent, you lose out on 15 percent growth.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
Advisory fees in non-fiduciary managed accounts. If you have investments with an advisor who operates as a fiduciary, some of the fees you pay may be easy to spot. “Registered investment advisors and investment advisor representatives are obligated to follow the best-interest standard when recommending financial products to clients and must disclose their management fees,” Scheer says. If you work with someone who is not considered a fiduciary, such as a broker, the fees and charges may not be as transparent. To learn what you’re paying, ask to see your total annual charges. Then compare that amount to the value and service you are receiving to determine if you are comfortable with the fees.
Brokerage account inactivity fees. If you have an account that allows you to buy and trade at any time, there may be drawbacks for not trading. If your retirement schedule picks up and you don’t trade for a few months, you could face an unexpected charge. “Many of the larger brokerage firms charge steep fees for just three months of inactivity,” Scheer says. “These fees can be as high as $45 per quarter or $180 per year.”
Penalties for not taking required minimum distributions. The IRS requires those over age 70 1/2 with an IRA to take a required minimum distribution each year. If this amount is taken by December 31, you won’t face any fees. If you don’t meet the deadline, the penalty is 50 percent of the required withdrawal amount.
Mutual fund expense ratios. These costs, also called 12b-1 fees, are charged to shareholders to cover a fund’s annual expenses. “Each fund sets its own rates, so it’s important to know what you’re paying,” Scheer says. If you’re not sure what the fees are for your investments, ask what you are spending on an annual basis. Use the fund analyzer from FINRA to compare the value and costs of different funds.
[Read: 401(k) Mistakes to Avoid.]
Home costs. When you retire, if you stay in the home where you raised a family, you may need to make unforeseen repairs during the next few years as the home ages. You might also make adjustments to age in place, such as adding a walk-in shower or downstairs bedroom.
In some regions, you could be paying more than you need to for property taxes. “Look into property taxes that may go down or freeze for seniors in your area that you might be able to apply for,” says Robert Steen, advice director for retirement and complex financial planning at USAA. Check online or ask at a community senior center to learn what tax breaks are available for seniors in your city.
Rising health care costs. After paying for health insurance, it can be easy to overlook ongoing fees like co-payments and prescription costs. During the coming years, your health care costs could also increase. To prepare for unexpected fees, “think of your total out-of-pocket risk,” Steen says. Consider what you might need to pay if you or a loved one faced a long hospital stay or time in a care facility. Then evaluate if you have the resources to pay for such an event. If you don’t have the funds to cover unexpected health care costs, think about purchasing additional medical coverage or long-term care insurance.
[Read: How to Avoid Medicare Scams.]
Car insurance. If you have two cars, you may only use one for most of your outings during retirement. And if you have one car, you might not drive it as far as you did when you went to the office every day. As a result, you might be paying for car insurance coverage you no longer need. “Almost every insurer is willing to have a consultative discussion with you on any areas that may help reduce your costs,” says Matthew Gaffey, a senior wealth manager at Corbett Road Investment Management in McLean, Virginia. You might get a discount for your driving record, the amount of usage on the car or for belonging to an organization.
Travel expenses. While you may want to travel in retirement, costs are not always obvious and can add up. For example, if you purchase a cruise, you’ll pay upfront for boarding, food and entertainment, and then you might spend more on tips, drinks and excursions on the ship. “Call ahead to find out what fees or additional expenses you should expect from departure to return,” Omo says.
Inflation. You might not think about it every day, but over the years inflation can impact your nest egg. “Address this risk in your investments and how they are structured,” Gaffey says. “Without some equity exposure in your portfolio, the money you worked hard to earn over several years will progressively lose more and more of its value.”
More from U.S. News
10 Ways to Reduce Your Housing Costs in Retirement
The Best Places to Retire in 2018
10 Tips for Rolling Over a 401(k) When You Change Jobs
10 Hidden Fees to Be Aware of in Retirement originally appeared on usnews.com
