Planning for Unexpected Expenses in Retirement

Retirement is a time that many people look forward to. It’s time to finally sit back and enjoy some well-deserved rest and relaxation. However, with any major life change it’s important to plan ahead and help be prepared for the unexpected. 

To help retirees in Iowa face these financial challenges with confidence, Johnson Wealth and Income Management has compiled a guide to help you prepare for unforeseen expenses and help safeguard your retirement. In this blog, we will discuss the types of expenses that can arise, and some strategies to help mitigate their impact on your retirement savings. 

1. Hidden Housing Costs

Mortgages are the largest debt owned by many Americans, but paying them off before reaching retirement age isn’t feasible for everyone. In fact, across the country, nearly 10 million homeowners who are still paying off their mortgage are 65 and older.

Many look beyond their monthly mortgage payment when estimating their long-term housing costs. According to a recent study, home repairs are retirees’ single most common financial surprise.

To avoid being caught off guard, it’s important to have a plan in place for covering these unexpected housing expenses. One helpful strategy is to have your home inspected by a professional to identify any hidden problems before they become major headaches. This can include issues with your roof, plumbing, electrical system, or other major components of your home. A good rule of thumb is to budget 1% of your home’s total value for annual repairs and maintenance. For example, if your home is worth $500,000, you should budget $5,000 per year for repairs and maintenance.

By taking these steps, you can help ensure that unexpected home repairs do not derail your retirement. With careful planning and budgeting, you can better enjoy your home and your retirement with greater peace of mind.

2. Healthcare Costs

A common issue among retirees is a lack of understanding regarding the extent of Medicare coverage. While Original Medicare (consisting of Part A for hospital stays and Part B for doctor visits) may be familiar to many, it’s important to note that numerous additional expenses and services are not included in this coverage. 

This may mean enrolling in additional Medicare parts or purchasing a private Medigap policy which can help cover expenses like deductibles, coinsurance, and copays. 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.

According to recent data, 24% of Medicare beneficiaries who enrolled in a Medicare Advantage plan did so because of its added benefits, while 20% cited the limit on out-of-pocket spending as their primary reason for selecting this option.

No matter which option you ultimately choose, it’s wise to seek guidance from a trusted retirement income planner, such as a fiduciary advisor. A fiduciary advisor can assist you in reviewing your choices and determining the best course of action for your unique healthcare needs.

3. Long-term Care

Someone turning 65 today has almost a 70% chance of needing long-term care services and support in their remaining years. Retirees may be able to reduce long-term care costs by turning to their families for help. However, those who can’t or don’t want to rely on their loved ones for care can generally help cover these expenses in one of two ways:

  • Out of pocket: One option is to pay out of pocket when needed, but this requires significant savings. Wealthier individuals may prefer this approach to avoid paying for insurance they may not use. However, it’s important to keep in mind that providing care can come with a financial cost for loved ones, even if private in-home or other care is not explicitly paid for.
  • Long-term care insurance: For many, it’s unrealistic to come up with an extra $100,000 or more for long-term care expenses. Long-term care insurance can help offer quality care without requiring individuals to liquidate their assets. The best way to help lock in an affordable premium is to purchase a policy in your 50s or early 60s, assuming you are healthy and insurable.

4. Death of a Spouse

The loss of a spouse is a difficult experience for which no one can fully prepare. However, neglecting to prepare financially can leave you in a vulnerable position. The good news is that by taking action now, you can help reduce your future risk and help ensure that you have adequate coverage.

  • Life Insurance: This is typically paid out upon the insurer’s death. Be sure to review your net worth statement, future cash flows, and goals to see if there are any significant gaps.
  • Pensions: It’s best to seek guidance from a Fiduciary advisor if both you and your spouse are eligible for survivorships. They can help you assess how your sources of income will fit together both during your lifetimes and after one of you passes away.
  • 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.

Lastly, ensure your estate plan is up to date to help ensure a smooth transition upon your or your loved one’s passing. A Fiduciary advisor can help you identify and correct any gaps in your plan.

How to Help Prepare for the Unexpected

You might not be planning to experience the above unexpected financial shocks in retirement. But you should be ready for them. Here’s a few recommendations on how to better prepare for unexpected financial shocks.

1. Build an Emergency Fund

An emergency fund is a crucial component of financial planning, particularly for retirees. Aim to have at least six months’ worth of living expenses saved in a separate account. This fund will help act as a financial safety net in the event of unforeseen expenses, such as medical emergencies, home repairs, or car maintenance. Regularly reviewing and adjusting your emergency fund helps ensure that you can weather any financial storm.

2. Maintain a Flexible Budget

A flexible budget allows you to adapt to unexpected expenses and helps minimize a negative impact on your overall financial plan. Categorize your expenses into fixed, variable, and discretionary. Fixed expenses include necessities like housing, utilities, and insurance premiums, while variable expenses encompass items like groceries, transportation, and medical costs. Discretionary expenses are for non-essential items, such as entertainment and hobbies. By prioritizing and adjusting your spending, you can help accommodate unforeseen costs without jeopardizing your retirement fund.

3. Stay Informed about Social Security Benefits

Understanding your Social Security benefits is essential for retirement planning. Staying informed about any changes to the program can help you make the most of your benefits and prepare for any potential reductions in income. Consider strategies such as delaying benefits to increase your monthly payments or coordinating benefits with your spouse to try and maximize your income.

4. Work with a Financial Advisor

Navigating retirement finances can be complex and overwhelming. Partnering with a trusted financial adviser, such as those at Johnson Wealth and Income Management, can provide invaluable guidance and support. A financial advisor can assess your current financial situation, identify potential risks, and develop a personalized plan to help you prepare for unexpected expenses.

Final Thoughts

Unexpected expenses can be a significant source of stress for retirees in Iowa. However, by following the above steps, you can help face these challenges with confidence. At Johnson Wealth and Income Management, we are committed to helping you secure a comfortable and worry-free retirement, no matter what life throws your way.

Having a trusted advisor by your side can make all the difference in preparing for unexpected events. Our Iowa-based Fiduciaries are here to help you navigate the complexities of financial planning and find peace of mind knowing that you’re well-prepared for whatever the future may hold.

Ready to get started? Contact us today to schedule your complimentary retirement consultation.


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