Regardless of how much you prepare for retirement, it is impossible to predict which unexpected situation might put additional stress on your bank account. If not properly planned for, these expenses can easily derail a retirement budget. Some of these risks are more common than others. Unfortunately, too many people plan for retirement by only accounting for current pre-retirement expenses. However, Employee Benefit Research conducted a study in which they said that about 40% of retirees agreed that their retirement expenses were higher than expected.
Proper retirement planning is crucial. It helps you to achieve retirement income goals and determine the actions needed to complete those goals. Retirement planning includes identifying all sources of income, possible expenses, and implementing a saving program. Here in this article, we will discuss some of the common, but unexpected expenses, that many encounter after retirement. It is not always possible to dodge all of these unexpected events. Still, with a little planning, you can minimize the consequences of those events.
1. Home Repairs
One thing people look forward to in retirement is being able to spend relaxing time at home. However, that same home is a potential cause of serious expenses. As with any house, there comes a time when it needs repairs and updates. One helpful tip is to get a home inspection before retiring. An inspection is typically in the range of $400-$500, but it can expose potential dangers or problems that could cost you more in the long-run. Plus, if you expect to sell your home and downsize or move into a senior living community in the future, the inspection will get you one step ahead, and you can begin taking care of high-priority items early.
The general rule is to expect to spend 1%-3% of the home's value on repairs and expenses annually. This means that for a $400,000 home, you should plan to have $4,000-$12,000 set aside each year. However, take into consideration that some years may be higher when larger repairs like a new roof are needed.
2. Natural Disasters
Natural disasters can be a source of significant expenses for retirees. Wildfires, hurricanes, lightning, and floods are some of the most common natural disasters that cause significant damages. Always ensure you are properly insured. However, you cannot count on insurance alone to cover all costs related to natural disasters. It is best to be prepared to cover as much of these expenses as needed as insurance may only provide partial coverage while you will need to take care of most of the damages by yourself. This can be a big problem after retirement. It is wise to have an emergency savings account in retirement to help cover major expenses like this.
3. Economic Downturn
While it may not be a traditional "expense", an economic downturn can seriously affect retirement finances. Perhaps your investments are suddenly worth significantly less. Can you wait it out and hope they increase in value again, or do you need the cash and feel pressured to sell your investments at a reduced value? Ensure you are in a position that a 10%+ loss to retirement savings/investments does not put too much of a strain on your financial health.
On a similar note, downsizing is a great idea for many retirees. However, a problem arises if you are planning to fund a significant part of your retirement with the sale of your current home. Similar to the stock market, housing prices can change quickly, and you might not be able to sell your home for as much as you expected. Therefore, it is best not to plan retirement around the sale of your home, especially if you might be pressured to sell before the market can recover.
Fraud is, unfortunately, a growing concern for older adults in America. Whether it is in the form of hackers stealing information, malware, email/phone scams, or any other form of fraud, criminals are trying to scam money from seniors. Every year, too many people fall victim to these scams, which can be very detrimental to retirement savings. According to CNBC, scams cheat older adults in the U.S. out of almost $3 Billion a year!
Check out the American Bar Associastion's list of scams to watch our for, and keep yourself and your wallet safe!
5. Health Care Expenses
Health care should be a primary component of any retirement plan. However, it is common to underestimate expenses related to healthcare. Whether it is an over-reliance on social security or medicare, or the emergence of new health complications, health care must be planned for properly. It is impossible to predict future health concerns, and it can be difficult to even think about declining health in years to come, but it cannot be ignored.
To learn more, check out this blog from The Balance, How to Plan for Health Care Costs in Retirement.
Divorce is never an easy process. Deciding to end a marriage has major considerations other than emotional and societal challenges. One major factor is cost. In many, legal fees are the greatest financial costs of divorce. As with other expenses, prior planning can save you from an uncertain condition. According to TheStreet, the average cost of a divorce is about $15,000 per person. This includes costs such as court fees, attorneys cost, tax advisor fees, real estate appraisal, or child custody evaluator.
According to Pew Research Center, divorce rate for Americans over 60 has tripled since 1990. Divorce results in divided assets and increased expenses. Your retirement funds may split between you and your spouse, which will result in less money available to invest, support, and grow an existing lifestyle. You may need to find a new place to live, which will increase your expense a lot. This is a type of expense that not many people can prepare for.
While there are plenty of other uncommon and unexpected expenses, these six are often overlooked and affect too many retirees. Look at your individual situation and consider how you should best plan and prepare. If needed, it can be extremely beneficial to hire a professional to help you plan for retirement.
What do you think? Tell us below what expense caught you off guard in retirement!