Taking out an extra $10,000 from your savings for a new roof may not seem like a big deal at the time. However, costs accumulate, and plans to cover future expenses may be disturbed. Every penny counts in retirement, so you should create a detailed budget that addresses as many potential issues as possible. To that end, here are some common but unexpected retirement expenses, as well as some tips for better planning.
Home Repair Costs
Nearly 80% of those 65 and older own their homes.* Despite this, many retirees and pre-retirees undervalue their long-term housing costs by focusing solely on monthly mortgage payments. According to a survey,* home repair costs are the most significant unforeseen retirement expense.
If it has been a while since you purchased your home, having it re-inspected by a professional may help in detecting problems early, before they become much more difficult to deal with. A good rule of thumb is to budget for annual house repairs and maintenance at an amount equal to 1% of your house’s total value.*
If you plan to live in the same house for the rest of your life, you should think about potential expenses like wheelchair accessibility or other disability-related modifications. As unpleasant as it is to dwell on, planning for such issues is necessary if you intend to live comfortably in the same place for the rest of your life.
Uncovered Healthcare
Even with Medicare, it’s no secret that healthcare can be costly in retirement. However, many retirees underestimate the cost, partially because they believe Medicare covers more than it does.
Part A, which covers hospital stays, and Part B, which covers doctor visits, make up original Medicare. Many other expenses that you may consider routine—such as dental, hearing, and eye care, as well as copays and prescription drugs—are only covered by supplemental Medicare plans, which cost more.
For example, you can sign up for Medicare’s standalone prescription medication program, known as Part D. You could also look into purchasing private insurance to cover routine dental, hearing, and vision care. Another option is to purchase a private Medicare Advantage plan, which combines Parts A and B and may include dental, hearing, and vision benefits.
Overall, it is appropriate to set a monthly healthcare budget of “$450 to $850 per person.”* This covers both plan premiums and out-of-pocket expenses. The amount, however, varies greatly within that range depending on your specific healthcare requirements.
Long-Term Care
The US Department of Health and Human Services predicts that approximately 70% of today’s 65-year-olds will require long-term care for an average of three years, with high and rising costs.* Americans are becoming more aware of these retirement expenses, but the vast majority still do not plan for them—or even know where to start.
Some retirees may be able to reduce long-term care costs by relying on their families; however, those who are unable or unwilling to rely on their loved ones, or who recognize the financial and emotional costs for potential family caregivers, typically cover these expenses in one of two ways.
Paying out of pocket is an option, but it necessitates substantial reserves to cover the costs. The benefit of this system is that you only pay to cover what you need. Remember, too, that there is frequently a financial penalty for loved ones who are expected to provide care, even if there is no set fee for private in-home care.
Long-Term Care Insurance can also be used to help people get the quality care they need. After all, for the majority of people, raising an additional $100,000 or more isn’t viable. It is typically recommended* that you purchase a policy in your 50s or early 60s, while you are still healthy and insurable, to lock in a lower premium.
When deciding which option is best for you, consider your estate planning goals and needs, too. Even if you can afford to pay out of pocket, long-term care insurance might help you keep your savings.*
Losing a Spouse
It’s difficult to think about possibly losing your spouse. However, failing to financially plan for it can put you in a difficult situation–or your spouse, if you’re the one to pass away first–due to the unexpected retirement expenses that may come with it. The good news is that you can take steps now and in the future to reduce this risk.
Life insurance: The death benefit from life insurance can help offset a loss of income. Examine your future plans to see if there are any significant gaps you might want to cover for your surviving spouse.
Pensions: If you or your spouse are eligible for a pension, consider survivorship options. Opting for survivor benefits may reduce your monthly benefit, but payments will continue even after your passing. It’s best to discuss your options with a financial professional, who can walk you through how all of your income streams can work together.
Your surviving spouse can receive Social Security benefits after your passing. If you’re the higher earner and haven’t started collecting benefits yet, it may be a good idea to wait as long as possible to begin collecting benefits. This is because each year that you delay taking benefits past the full retirement age increases your eventual benefits by 8%, maxing out at age 70. This could ensure that your surviving spouse receives the maximum benefit.
Finally, ensure that your estate plans are in order and up to date so that assets are transferred smoothly after your death. An estate planning attorney can help you identify and address any gaps in your current strategy.
Try Not to Stress
It’s impossible to predict every curveball life will throw at you, but even a little extra planning can help you deal with unexpected retirement expenses. Working with a financial professional to discuss these and other concerns can help you anticipate and address future problems. The better prepared you are, the more confident you will be in retirement.
If you’d like to learn more about how to financially prepare for retirement, including how to reduce the negative impact of taxes, earn reasonable rates of return (over time), and stay protected even during a market downturn, please contact us. We’re always willing to help.
*Source: Schwab.com
