Yahoo Finance How to Prepare for 5 Unexpected Costs of Retirement
Retirees planning their budgets may think they covered all their bases by accounting for housing, dining and transportation costs. After all, those are some of the major expenses incurred by baby boomers, according to the Bureau of Labor Statistics.
However, they could be setting themselves up for financial failure if they don't consider other unforeseen expenses that might be lurking in their future, such as those associated with providing assistance to children or a broken marriage. "These are expenses that are not built into the budget or the cash flow," says Paul I. Franklin, principal of financial advisory firm Franklin Capital Strategies in Vienna, Virginia.
Below are five unexpected expenses that retirees might not anticipate -- and how to prepare for them.
[Read: Social Security Changes Coming in 2018.]
1. Boomerang kids. Between staying in school longer and delaying marriage, today's young adults are less likely than their predecessors to set up their own households in their 20s, according to findings from a 2017 report from the Census Bureau. Instead, they may rely on mom or dad for financial support, with a third of 18- to 34-year-olds living with their parents in 2015.
"That's delaying the ability of parents to retire," Franklin says. Rather than indulge children indefinitely, parents should set firm expectations for how long financial support will continue and when children will need to pay their own way.
2. Elderly parents. It isn't just adult children who could move in with retirees. In some cases, baby boomers find themselves living with elderly parents and providing their care. The Pew Research Center found 14 percent of adults living in a shared household in 2017 were parents who had moved in with an adult child.
"They've been called the sandwich generation, and that's a good term," says Dave Louton, a professor of finance at Bryant University in Smithfield, Rhode Island. Baby boomers feel a sense of obligation to meet the needs of both their children and parents. "You're going to split the last crust of bread with them."
Retirees may be able to anticipate whether they will need to provide this support if their parents are open about their financial situation. If not, the best way to prepare may be to investigate in advance what options are available from the government and local nonprofits. For instance, in some states, Medicaid can be used to pay for in-home care for those with limited income and assets.
3. Home and car maintenance. The most common unexpected expense -- the ongoing maintenance that is required with homes and vehicles -- isn't necessarily the biggest. It may not occur to retirees that their car could have a major failure or an appliance will need to be replaced. "That's a $1,000 here and a $1,000 there," Franklin says.
Matt Fellowes, founder and CEO of online financial advisory firm United Income, says retirees should be careful not to compound the problem by pulling money from investments to pay for these expenses, particularly during times when their portfolio is seeing losses. If a person can't pay for these unexpected expenses out of their normal monthly income, a better option may be to charge them and pay off the debt over several months.
To be prepared for unexpected expenses, Fellowes recommends having a line of credit ready. "Make sure you have a good credit card so you're not withdrawing from a retirement fund in a down market," he says.
[See: 10 Ways Retirement Will Surprise You.]
4. Health care expenses. Despite the fact retiree health care expenses can add up to $275,000 per couple, according to a 2017 report from Fidelity Benefits Consulting, many people erroneously think government programs will pay for the bulk of their costs. "People tend to assume they are in the clear on that when they're not," Louton says.
Medicare won't pay for most dental care, dentures, hearing aids and routine foot care, among other things. Most importantly, it doesn't cover long-term care. It's those costs that can quickly add up. The U.S. Department of Health and Human Services estimates the national average price for a semi-private nursing home room was $6,844 a month in 2016.
Younger workers may be able to afford long-term care insurance to cover this expense, but these policies can be cost-prohibitive for those closer to retirement age. Otherwise, those with qualified high-deductible health insurance plans can open a h ealth savings account to save tax-deductible money for future expenses. If neither of those are options, the best bet may be simply to save extra in anticipation of needing care. "We like to recommend that [clients] carve out a portion of their portfolio for long-term care," Fellowes says.
5. Divorce. Perhaps one of the most unexpected expenses to be found in retirement is that associated with divorce. A 2017 study from the Pew Research Center found the divorce rate for those age 50 and older increased 109 percent from 1990 to 2015. That means some older workers may not only be losing a job in retirement. They may be losing a spouse as well.
"Once they become empty nesters, [couples] drift apart," says Garrett Oakley, a CPA and certified financial planner with online advisory firm Betterment. "People just realize they want different things out of life."
A divorce means divided assets and increased expenses. Retirement funds may be split between spouses, meaning less money is available to invest, grow and support an existing lifestyle. What's more, at least one half of the couple will need to find a new place to live, which could mean taking on a mortgage or new rental payments. Plus, the recent tax reform removes deductions for alimony in divorce occurring in or after 2019.
No one wants to walk into retirement expecting a divorce, and Oakley says there is not much people can do to prepare for this unexpected event. However, he does recommend both spouses stay informed of their household finances. Then, they will be ready to manage money on their own -- whether that be because of a divorce or a death. "At least you don't feel like you're completely blindsided," Oakley says.
[See: 7 New Taxes Retirees Face.]
Retirement is new territory for people who will find many unexpected events are part of their journey from the workforce. However, with a little forward planning, these five expenses don't have to be some of them.
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