How to Plan for Unexpected Expenses Post-Retirement
Summary: Unexpected expenses can catch you off guard, but with a well-thought-out retirement plan, you can be better prepared to handle them.
It’s easy to imagine retirement as a time of endless relaxation, filled with vacations and the chance to dive into hobbies you’ve always wanted to pursue.
While retirement is certainly a wonderful chapter of life, it comes with its own set of financial challenges, particularly unexpected expenses. In fact, 1 in 5 retirees experience unforeseen costs1.
These unexpected costs can be particularly detrimental because many retirees are on a fixed income. Dipping into their principal savings to cover these expenses can reduce the income they rely on, potentially jeopardizing their financial security in the long term.
Let’s find out how you can plan for those unexpected expenses during retirement and keep your golden years stress-free.
The Reality of Unforeseen Retirement Expenses
Retirement expenses can be unpredictable which is why many financial sources recommend that you’ll need about 70-80% of your pre-retirement income to maintain your standard of living once you stop working2.
The common misconception is that expenses significantly decrease once you retire, with certain costs such as the daily commute or work-related expenses no longer in the picture.
However, unexpected expenses can sneak in, including those not in your original plan. Your life in retirement may not mirror your current lifestyle and you could do some scenario planning to cover costs that could upend your retirement budget.
- Healthcare costs: You might dismiss the idea of facing health issues now, but the reality is, that medical expenses typically rise with age and in response to inflation. Milliman Retiree Health Cost Index estimates that a 65-year-old couple retiring in 2024 will need about $395,000 to cover healthcare costs in retirement. That’s up from the $315,000 it cost last year3.
These costs include premiums, deductibles, and out-of-pocket expenses, but not long- term care. So, while healthcare coverage in retirement, like Medicare, can help, it doesn’t cover everything, leaving some gaps that could impact your savings.
Hence, you would need to plan for potential medical emergencies, especially so if you have chronic health conditions.
- Home repairs and maintenance: Your home might need some tender loving care as the years roll by. Roofs leak, appliances break down, and let’s not even start on plumbing issues. On average, homeowners spend 1% to 4% of their home’s value annually on maintenance and repairs.
For a $300,000 home, that’s up to $12,000 a year! Having a dedicated fund for home repairs can prevent these costs from derailing your retirement budget. Additionally, downsizing to a smaller home could mean lower repair and maintenance costs, making your retirement savings stretch further.
- Long-term care: Most of us prefer not to think about long-term care. However, according to the U.S. Department of Health and Human Services, someone turning 65 today has almost a 70% chance of needingsome type of long-term care services in their remaining years.
The cost? A staggering $108,405 per year on average for a private room in a nursing home. Even if you optfor home health aides or assisted living, the expenses can still add up quickly.
How to Plan for Retirement with Unexpected Expenses in Mind
Now that we’ve identified some of the expenses, how do we plan for them?
1.Build a solid emergency fund
First and foremost, an emergency fund is a must. Financial professionals typically recommend having three to six months’ worth of living expenses set aside. However, retirees may have more unpredictable expenses, due to relying on a fixed income and having fewer opportunities to increase earnings. Unexpected costs like healthcare, home repairs, or supporting family members can have a more significant impact in retirement. Because of this, it might be wise to aim for a larger cushion, like six to twelve months’ worth of living expenses.
2.Create a retirement budget
Creating a detailed retirement budget is the cornerstone of a solid retirement plan. This budget should include your expected monthly expenses, such as housing, utilities, food, and insurance. But don’t stop there. You also need to factor in less frequent expenses like property taxes, vehicle maintenance, and occasional big-ticket items like a new roof or a kitchen remodel.
3.Prepare for healthcare costs
Healthcare is often one of the largest for retirees. Even with health coverage like Medicare, out- of-pocket costs can add up quickly.
The Milliman Index estimates that a healthy 65-year-old male retiring today with a Medicare Advantage plan can expect to spend around $128,000 on healthcare throughout his lifetime. Meanwhile, a female with the same coverage is projected to spend approximately $147,0003.
For those with Medicare supplement insurance plans, costs can be higher but typically have broader coverage networks and a steady, predictable bill. These figures are based on average data and can vary depending on individual circumstances3.
To prepare for these expenses, visit your doctor regularly to learn about potential issues and ways to prevent or manage them. Know your healthcare premiums. If you’re still working and have a high-deductible health plan, consider a health savings account (HSA). HSAs allow you to contribute pre-tax dollars, which can grow tax-free and be used for qualified medical expenses, including in retirement. This can be a valuable tool for building up a fund to help cover healthcare costs later in life.
4. Long-term care planning
Long-term care is another significant expense that can catch retirees off guard. As you age, you may need some form of long-term care services, ranging from in-home care to assisted living or nursing home care.
These services are not covered by Medicare and costs can be substantial. To help protect yourself, look into long-term care insurance, which can help cover the costs of these services.
While policies can be expensive, having this coverage can provide significant peace of mind. Alternatively, some life insurance policies offer long-term care riders, which allow you to use a portion of the death benefit for long-term care expenses.
5.Diversify your income streams
Relying solely on Social Security and a pension, if you have one, may not be enough to cover all your retirement expenses.
Diversifying your income streams can help ensure financial stability. This might include part-time work, rental income, dividends from investments, or even monetizing a hobby.
Consider annuities as well, which can provide a steady income stream for a specified period or for life. However, it’s important to understand the terms and fees associated with annuities, as they can be complex financial products. Consider consulting with a financial professional to help understand and maximize your income streams.
Enjoying retirement
Finally, remember that retirement is a time to enjoy the fruits of your labor.
When you access the right knowledge, you can help safeguard your financial future and truly enjoy your retirement years without constant money worries.
At Mutual of Omaha, we’re here to help you navigate retirement and all of life’s transitions. For more resources and helpful tips, visit our Planning and Advice section. If you need personalized guidance to chart out this important phase of your life, don’t hesitate to reach out to us.
Here’s to a fulfilling, healthy, and financially secure retirement!
Frequently asked questions
Q1: Why is an emergency fund important in retirement?
An emergency fund can act as a financial safety net for unexpected expenses like medical bills, home repairs, or car maintenance, helping to prevent these costs from compromising your retirement budget.
Q2: How can I prepare for long-term care expenses?
Consider long-term care insurance, which can help cover the high costs of nursing homes, assisted living, or home health aides.
Sources:
3https://www.milliman.com/en/insight/retiree-health-cost-index-2024
Disclosures:
Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.
Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein isgeneral in nature and should not be considered tax and/or legal advice.
Not all Mutual of Omaha agents are registered representatives or financial advisors.
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