These surprise costs during retirement can mean canceling that dream vacation, or much worse.
You’ve reviewed your budget for retirement and you’re all set … or are you? Usually, expenses go down slightly after your working days are over. There’s no longer a use for that professional wardrobe, you don’t need the gas to drive into work and you may eat more lunches at home. Your house may be paid off, or nearly so, and that’s a load off your plate as well. You’ve budgeted for taxes and insurance, groceries, some entertainment, and the car … and you have a little account set aside for travel. What could go wrong?
Welcome to the world of “stealth” expenses, the ones most of us never plan for. If you think they can’t happen to you, look at the statistics: nearly 1 in 5 retirees, and 1 in 4 retired widows, experiences at least four or more of these events during their retirement years. If you haven’t planned for them to happen, the numbers show you should.
Let’s look at some of the most common financial shocks during retirement.
- Home repairs. Many retirees forget to set aside money for a new furnace or roof, two common items that need replacing over the three decades or so of retirement. You can’t put off getting a new furnace when your old one quits in the middle of winter and delaying a new roof when the old one is leaking can risk damaging your home’s interior. Both of these are expensive and necessary, and more than a quarter of retiree’s report needing at least one.
- Dental care. Have you priced a root canal lately? A crown? No, we’re not talking about a diamond tiara, but you might think you deserve one for the price! Dental work is expensive, and you’re likely to need more of it as you age. It’s also one of the big three (dental, hearing, vision) not covered under Medicare.
- Long-term care. Many retirees think Medicare will cover them in the event they need long-term care. Nope. In fact, average medical expenses for a couple in retirement run about $285,000 before adding in long-term care. With rooms going for up to $8,500 a month, it can quickly exhaust assets and in turn force retirees to turn to Medicaid for help.
- Never think you are immune; good financial planners will make sure you’re set as a couple but will also make sure that each of you separately will thrive in retirement. “Gray divorce” is a catchphrase for a phenomenon that is increasing in prevalence, and the nest egg that covered two people just fine may not work so well when you need separate housing, or when one person is gravely ill.
- Adult children. Just when you think all you have to worry about is yourself, your daughter gets divorced, or your son is overwhelmed by student loan debt and those little birds that flew the nest years ago come back.
- The sadness over the loss of a spouse can trigger depression, but what about the financial effects? If you’ve lost a pension or the one who handled your finances, it could be enough to throw your budget into jeopardy.
- Required distributions. Sure, you must make traditional IRA withdrawals after age 72, but that’s more money for you, right? Not necessarily. They can bump you up into a higher tax bracket, taking a percentage of the money you were counting on to continue growing. This extra income can also qualify you for higher Medicare Part B payments, which are tied to annual income.
- Replacement costs. The lawnmower quits, the refrigerator gives up, the deck begins to rot: all these replacement costs can ding your budget, especially if they happen at once. But when it’s your car, the amount needed can be as much as some couples spend in a year.
Tips for Managing Unexpected Retirement Expenses
Planning for these expenses is your best defense against them. Look at your budget and figure out what you’d do if they happened to you. Everyone should have an emergency fund, preferably assets, but it could be a line of home equity credit or reverse mortgage. Consider purchasing dental insurance to defray costs, and shop around among dentists for a good price. Long-term care insurance can help with this expense, although it’s important to compare policies. Learn how to say “no” to your adult children, at least for expenditures, if not for housing. Above all, avoid the use of high-cost debt such as credit cards and payday loans.