When you're living off your savings, unexpected expenses can undo years of diligent planning.
"Withdrawing an extra $10,000 for a new roof from savings might not seem like much in the grand scheme of things, but it set back a plan for other expenses, if you haven't anticipated it—especially since those funds are no longer at work in the market," says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.
When every dollar counts, your retirement spending plan needs to anticipate obstacles as much as possible. To that end, here are five common—yet unexpected—setbacks that can upend your retirement plan and how to better prepare for them.
1. Hidden housing costs
Nearly 80% of those ages 65 and older own their homes, according to the Joint Center for Housing Studies of Harvard University. However, a lot of pre-retirees fail to look beyond their monthly mortgage payment when estimating their long-term housing costs. Research from the Society of Actuaries found that unanticipated home repairs are retirees’ single most common financial surprise.1
"If it's been a while since you purchased your residence, having it re-inspected by a professional can help identify hidden problems before they become major headaches," Rob says. A good rule of thumb is to budget 1% of your home's total value for annual repairs and maintenance.
If you aim to remain in your home long-term, you should also factor in potential costs or improvements, such as creating wheelchair access or other disability-related alterations. "As unpleasant as it is to contemplate, anticipating and planning for such challenges can make the transition easier—physically, emotionally, and on your finances," Rob says.
2. Uncovered health care
Even with Medicare, it's no secret that health care can cost you a pretty penny in retirement. "But many retirees don't fully appreciate just how much, in part because they believe Medicare covers more than it actually does," says David Jamison, a Certified Financial Planner™ professional and senior manager with Schwab's Centralized Planning Group.
Original Medicare comprises Part A, which covers hospital stays, and Part B, which covers doctor visits. Many other expenses and services you might assume were routine—such as dental, hearing, and vision care, as well as copays and prescription drugs—are covered only through supplemental plans, which cost extra.
For more complete coverage, you may need multiple plans. For example, you can sign up for Medicare's stand-alone prescription drug program, known as Part D, as well as purchase a private Medigap policy to help cover deductibles, coinsurance, and copays. You could also add private insurance to cover routine dental, hearing, and vision care.
Another approach would be to buy a private Medicare Advantage plan, which bundles parts A and B and can include dental, hearing, and vision care.
It's important to understand that each approach may come with costs and trade-offs. Medigap plans, for instance, may mean fewer out-of-pocket expenses but generally have higher premiums. Medicare Advantage, on the other hand, may have lower premiums but could involve more out-of-pocket expenses.
All told, it's reasonable to start with a budget between $450 and $850 per month per person for health care costs, including plan premiums and out-of-pocket expenses. The amount can vary widely, though, based on your situation as well as your current and future health or care needs.
"To help meet the rising costs of health care in retirement, a useful strategy to consider is contributing to a health savings account (HSA) each year while you’re working, if eligible," Rob says. Contributions to HSAs are federally tax deductible, earnings are tax-free, and withdrawals are also tax-free if used for qualified medical expenses, which include Medicare premiums and out-of-pocket costs but not Medigap and Medicare Advantage premiums. You can keep these savings, invest them without a drag from taxes, and use them in retirement to cover all or a portion of your health care costs, including premiums.
3. Long-term care
The U.S. Department of Health and Human Services estimates that close to 70% of today's 65- year-olds will require some kind of long-term care for an average of about three years, and the costs are high and rising.
For example, the national average cost2 for an in-home health aide in 2021 was $61,776, whereas a private room in a nursing home facility was $108,405. "Americans are becoming more aware of these potential expenses, but most still don't really plan for them—or even know where to start," David says.
Some retirees may be able to reduce long-term care costs by turning to their families for help, but those who can't or don't want to rely on their loved ones, or who realize there are financial and emotional costs for potential family caregivers as well, generally cover these expenses in one of two ways:
- Out of pocket: One approach is to pay out of pocket if and when the need arises, in which case you'll need significant savings to cover such costs. The benefit of this approach is that you pay for only what you need, which may be attractive to wealthier individuals who don't want to pay for insurance they may not use. Remember, too, that there’s often a financial cost for loved ones tasked to provide care, even if there's not an explicit cost for private in-home or other care.
- Long-term care insurance: For most people, coming up with an extra $100,000 or more isn't realistic. Long-term care insurance may allow them to get the quality care they need without having to liquidate their assets to pay for it. David says it's generally best to purchase a policy in your 50s or early 60s, assuming you’re still healthy and insurable, to lock in a more affordable premium. "Yes, you’ll be paying for something you might not end up needing, but that's true of many types of insurance—and you will have turned a potential financial surprise into a predictable expense," he notes.
When deciding which option is best for you, take into account your estate planning goals. Even if you can afford to pay out of pocket, a long-term care policy can help protect your savings if you want to leave a legacy or inheritance.
4. A child in crisis
It's natural to want to step in when your child needs financial help. But the older you are, the more difficult it can be to recover from such an unanticipated expenditure, depending on the money you've saved versus potential future needs. In fact, half of all parents financially helping an adult child say it's putting their retirement savings at risk.3 "When an adult child falls on hard times, retired parents often feel obligated to help, even when their savings can't really accommodate the added expense," David says.
Before offering your support, think about how much help you're able to provide—and for how long. "Are you willing to withdraw a large lump sum from your savings, for example, or would you be more comfortable covering smaller expenses over a longer time frame while they get back on their feet?" Rob asks.
If you do decide to dip into your retirement savings, be sure to have an honest conversation with your child about the terms of the arrangement—including whether the money will be a gift or a loan—and be clear about the extent to which you're willing to help.
"Boundaries and clear communication are really important in a situation like this," David emphasizes. "Your child may see the money as a gift while you expect to be paid back, which can cause conflict down the line." If you both agree to a loan, however, make sure you understand the rules surrounding intrafamily loans before you finalize the terms—the details are complicated and can create unexpected tax consequences.
For example, the IRS sets a minimum rate for such loans, called the applicable federal rate (AFR), which changes each month but generally approximates the rate paid by certificates of deposit and savings accounts. If your loan’s rate is below the AFR, or the IRS determines that the loan wasn’t really a loan at all, it may be treated as a gift for tax purposes (and subject to the $16,000 annual gift tax exclusion).
5. Losing a spouse
There's little you can do to prepare for the emotional shock of losing your spouse. But failing to prepare for it financially can leave you in a precarious position.
The good news is there are steps you can take now, and in the future, to mitigate such risk:
- Life insurance: The lump sum paid upon the insured's death can help offset a loss of income—be it from a paycheck, a pension, or Social Security. "Review your net worth statement, future cash flows, and goals to see if there are any significant gaps you may want to insure for your surviving spouse," Rob advises.
- Pensions: If you or your spouse is eligible for a pension, investigate survivorship options before you retire. "Opting for survivor benefits may reduce your monthly benefit, but payments will persist even after you pass," Rob says. It's best to weigh your options with a financial planner, who can help you think through how all your sources of income fit together—now and after a death.
- Social Security: Your surviving spouse is eligible to receive your Social Security benefit upon your death. If you're the higher earner and not yet collecting benefits, it may make sense to delay doing so as long as possible. That's because every year you delay past full retirement age (between 66 and 67 for today's retirees) increases your benefit by 8% (up to age 70, past which there is no incremental benefit). Not only does this increase your benefit during your lifetime, but it also ensures the surviving spouse—whether that's you or your mate—is left with the biggest possible benefit. Once one spouse dies, the survivor can collect reduced benefits as early as age 60 (50 if disabled) but waiting until full retirement age will ensure the largest payout. "Remember," says Rob, "Social Security can be viewed as type of insurance, to provide payments, that will rise with inflation each year and last as long as you, or your spouse, does."
Finally, make sure your estate plan is organized and up to date to help ensure a smooth transition of assets upon your passing. An estate-planning attorney can help you identify and correct any gaps in your plan.
It's impossible to dodge every curveball life will throw at you, but even a little extra forethought can make unexpected expenses more manageable.
"Working with a financial planner—who can discuss each of these issues, and others—can help you anticipate potential problems and prepare you for surprises when they arise," Rob says. "And the more prepared you are, the more confident you're likely to feel as you transition to retirement."
1 Anna Rappaport, Shocks and the Unexpected: An Important Factor in Retirement, Society of Actuaries, 2017.
2 "Cost of Care Survey," Genworth, 2021.
3 Kelly Anne Smith, "Half of parents financially helping their adult children say it’s putting retirement savings at risk," bankrate.com, 04/24/2019.