Close up of a senior couple having breakfast and doing bills
Only about one in four retirees has not experienced any kind of shock event in retirement, according to a study from the Society of Actuaries. And these shock events — like a huge dental bill, for example — often come with a shock price tag too. That can be particularly difficult for retirees, as unlike when someone is working and generating a steady paycheck, retirees’ must rely on their long-term planning and set monthly distribution checks.
The good news? Bolstering your savings can protect against these shock events. “With retired clients, one of the bigger items that we talk about is how many months of distributions we want to set aside for extra money for unforeseen, or irregular expenses,” said Peter T. Palion, certified financial planner and president of Master Plan Advisory in East Norwich, New York. (See the best savings account rates you may get here.)
Caring for loved ones
This is one of the most unforeseen expenditures in retirement, and includes the medical needs of a spouse, parent, child or grandchild, says Spencer Betts, a certified financial planner, chief compliance officer and financial consultant at Bickling Financial in Lexington, Massachusetts.
“These are almost impossible to predict, but taking care of someone’s long-term care needs can get extremely expensive,” he says, adding that this type of care could also include helping a loved one with addiction, a divorce settlement, bankruptcies and other financial focused needs. “Not only will this take financial resources but could include relocating and hours and hours of personal time.”
Caregiving causes a financial hit: For example, spousal caregivers between the ages of 59 and 66 had 50% less in IRA assets, 39% less in non-IRA assets and 11% less in Social Security income, as well as less income than married non-caregivers, the report found.
But planning for this phase can be especially difficult because of the large price differential depending on the care needed, says Betts. “On the inexpensive side there is basic care, like a traveling nurse that comes to your home a couple times a week and makes sure you are taking medicines and helps with some basic tasks. On the more expensive side are Alzheimer units that provide round the clock monitoring of elderly patients.”
The first step when it comes to planning for this phase of life is “to look at your family’s health history,” Betts said. In addition to considering long-term care insurance, he says that it is also imperative to investigate “the cost of care near where you live or where you would like to retire,” as that can “vary greatly based on your location.”
Couples who are 65 or older can expect to spend around $315,000 after-tax dollars on health and medical expenses throughout retirement, a study from Fidelity found.
That said, it shouldn’t be a surprise that nearly one-fifth of retirees say they are surprised by significant out-of-pocket medical and prescription expenses, according to the Society of Actuaries report. “This does not include if a client wants to move to some type of assisted living situation where they can have someone cook for them or have a nurse that checks in on them,” according to Christopher Lyman, a financial advisor at Allied Financial Advisors in Newtown, Pennsylvania.
Source: 2015 Society of Actuaries’ Survey of Post-Retirement Risk and the Process of Retirement
A report from RBC Wealth Management found that healthy 65-year-olds can expect to one day spend as much as $100,000-per-year on long-term costs, which include nursing homes, home care or hybrid options.
Lyman says a critical part of planning for retirement is factoring in your health and your expected quality of life. You will need to account for additional funds for medical specialists and medications in your senior years, he said.
Around 76% of people ages 65 to 79, and 68% of those over the age of 80 are currently living in single-family homes, according to a research report from the Joint Center For Housing Studies at Harvard University. In addition, nearly three-quarters of people 50 and older say they would prefer to stay in their current homes as they age, according to an AARP study.
With this many seniors owning and living in their own homes, the Society of Actuaries report found that 28% will one day experience unexpected repairs or undergo major home upgrades in retirement. The report also found that 16% of retirees said they were surprised by their home value dropping by more than 25%.
When it comes to planning on home repairs in retirement, however, Palion always reminds his clients that those costs are bound to one day arise. “If you do all of the home stuff when you’re not in retirement, you know things break down from time to time and need to be fixed, such as your washing machine or hot water boiler, or roof or whatever it may be.”
HELOCs or home equity loans and reverse mortgages are just some of the potential options you may have to combat these unforeseen expenses.
Betts says that when planning for his clients’ retirements, it’s critical to have more than one source of income to help buffer any unforeseen expenses related to home repairs. “If an unexpected expense arises, we have those two extra sources of income that hopefully will not derail their retirement plans.”
As far as unexpected expenses go, major dental work ranks near the top with 24% of retirees saying they were shocked with the amount they had to spend in retirement, according to the Society of Actuaries report.
Most seniors can expect to spend more than $20,000 in dental premiums and more than $12,000 on shared costs from age 65 in 2022 to age 87, according to HealthView Insights research. And while Medicare covers some things, HealthView Services Ron President Mastrogiovanni stresses that it “does not cover dental for things like fillings or pulling a tooth, and that’s why people should strongly consider dental coverage”
To avoid unnecessary stress and better plan for these expenses in retirement, Palion says to leave the guessing aside and assume you will need to spend money on your teeth in retirement.
“The cost of dental work impacts everyone,” he said. “Everybody has teeth so is it truly unexpected when you need some dental work? Unless you have some implants you would need some dental work.”
Assisting adult children
As many as 52% of young adults these days, from ages 18 to 29, are living with their parents, according to a report from Securian. That is nearly twice as many did so at the same age in 1960.
Why is that so hard to factor this in for retirement planning? “We cannot financially model those expenses and they often occur during inopportune times such as during a recession,” said Tom Balcom, CFP and founder of 1650 Wealth Management in Fort Lauderdale, Florida.
Is there anything that can be done to factor this potential spending into your long-term savings plan? Balcom says his firm suggests working with adult children on creating their own budget and ensuring that they are not overspending their means. “I often call this financial tough love,” he said. “If you’re making $50,000-per-year, you cannot spend $2,000-a-month on rent.”
Balcom’s firm also advises its clients to store up to six months of financial reserves in addition to any retirement funds. “With a number of hedged investments, our clients are always likely to have something that has appreciated, so the buy low, sell high strategy should always work.”
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