Expect the Unexpected Costs of Retirement

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Social Security, pension benefits, and savings can combine to help seniors maintain comfortable lifestyles after retirement. Careful preparation and advice from a financial adviser can produce a plan that addresses post-retirement needs and goals.

Still, to twist a popular war adage, it might be said that no retirement plan survives contact with the future. Unexpected expenses may cause savings to disappear more quickly than a retirement plan projected. Planning for the unexpected is the key to a financially sound retirement.

Anticipating every contingency is impossible. However, retirees encounter some expenses with such regularity that they really shouldn’t be regarded as unexpected.

Expect the Unexpected

Charles Schwab calls attention to five surprise expenses that won’t be a surprise to retirees who expect and prepare for them:

Housing costs. It’s easy to project future mortgage payments and the potential impact of property tax increases on those payments. It’s also easy to forget that houses are called money pits for a reason. Murphy’s law — “anything that can go wrong, will” —should guide expectations about future housing expenses. Roof repairs, mechanical failures, and plumbing disasters are the kinds of problems that every homeowner should anticipate. Retirement doesn’t insulate homeowners from making expensive home repairs.

Schwab suggests having a professional inspection of a house shortly before retirement. The projected expense of future repairs can be incorporated into a retirement budget. Schwab suggests that 1% of the home’s value is a good starting point for estimating the cost of annual repairs.

Healthcare Expenses. Medicare is an important benefit for retirees, but it doesn’t cover every healthcare expense. Dental work, vision care, and hearing aids are not covered by Medicare. Individuals who have not yet enrolled in or used Medicare may underestimate the cost of co-pays and prescriptions that Medicare does not cover.

Budgeting for supplemental insurance coverage is the best hedge against uninsured healthcare expenses. Medicare Part D, a Medigap policy, and Medicare Advantage plans are among the options. An eldercare advisor can help seniors decide how to plan for healthcare expenses that aren’t covered by Medicare.

Long-term care expenses. Statistics suggest that most older people will need long-term care at some point in their lives. Family members sometimes provide that care. When that isn’t a realistic or desirable option, anticipating the expense of a home health aide, an assisted living facility, or a nursing home should be part of retirement planning.

On average, older people need long-term care for about three years. Since the expense of long-term care can be significant, it may be best to purchase long-term care insurance. Schwab recommends making that purchase a few years before retirement, while the purchaser is still in good health and premiums are more affordable.

Family needs. While retirees can anticipate and attempt to control their future needs, it is more difficult to anticipate the needs of adult children. When a child has an uninsured medical crisis or suffers a financial disaster, parents want to help. Providing help may have a sizeable impact on retirement savings.

Apart from adding as much of a cushion as parents can afford to their retirement savings, parents should also think about how much help they can realistically provide to their children. Clear communication in response to requests for financial assistance can avoid unpleasant misunderstandings. Is the money needed in a lump sum or can it be provided from current income over a period of time? Is the money a loan or a gift? Remember that gifts may be subject to gift tax and that the IRS might treat an interest-free loan as if it is a gift.

Loss of Spouse’s Income. When couples plan for a retirement together, they often anticipate that two incomes will help them cover their expenses. When one spouse dies, one of those payments will end. Unfortunately, the survivor’s expenses are not automatically reduced by half with the death of a spouse. Rent, car payments, and other fixed expenditures might not change at all.

Planning for retirement includes the unpleasant chore of planning for death. Purchasing or maintaining life insurance can protect the surviving spouse from financial insecurity. Investigating the availability of survivorship benefits from Social Security and pension funds will assure that spouses know what to expect. A good estate plan is also a vital safeguard against unexpected consequences of a spouse’s death.

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