The Top 5 Unexpected Costs of Retirement
by Lisa LaMotta
Friday, April 16, 2010
Make space in your portfolio for these added risks.
Some people see retirement as a chance to sit back and relax, while others take advantage of their newfound time by traveling the globe. Either way you spin it, retirement costs money -- and some of your bills will be unexpected.
Here, investing and money management experts look at the top five expenses that aren't always factored into a retirement budget or investment plan. The good news? Almost all are related to a positive trend: people are living longer, healthier lives.
1. Living Longer
Happy 100th Birthday!
The average life expectancy in the US was 72.6 years in 1975, that rate has jumped to 77.9 years in 2007 (the latest year that data are available), but itís clear that many people are living well into their 80s, 90s, and even 100s. Despite our growing life spans and added vitality, the retirement age has lingered at 65. ďThis means that many people are going to be retired longer than they were working,Ē says Carl Macko, CFP, president of Synergy Capital in Smyrna, Georgia.
When planning your retirement savings, itís important to consider that you will likely have to live on that money for 25 to 30 years, maybe even more. Rande Spiegelman, CPA, CFP at Charles Schwab recommends planning to have a portfolio that is 25 times larger than what you expect to spend the first year you are retired. Thatís a hefty chunk of cash, even if everything goes according to plan (which it probably wonít).
Another thing to consider when thinking about retirement is the possibility that it could come earlier than you expected -- plenty of baby boomers were force into early retirement during the past year when their companies downsized.
2. Adult Children With Money Problems
Your empty nest may not stay that way.
The recent recession has probably taken its toll on your 401(k), but you may not have expected the toll it would take on your grown-up child.
As of February, 3.6 million people ages 25 to 34 (about 10.8% of the labor force) are unemployed, according to the US Bureau of Labor statistics. This means that if you're a retired person right now, many of your kids who left the nest years ago may be flocking back home for some parental financial help. A survey done by the Pew Research Center in 2009 shows that 13% of parents surveyed said that one of their kids came back to the nest in the last year.
Put aside how emotionally taxing this would be on all parties involved, and take into consideration the strain this could put on your finances. Kids, even the ones that are all grown up, cost money -- this means higher food and utility costs. It may also mean that you'll take on some of your childís debt, or maybe it just means some extra spending money to help ease their burden.
To protect your own retirement funds while supporting your child, experts suggest setting boundaries concerning the amount of money you're willing to give them and make sure that you agree on a time limit for their stay.
If you're not yet retired, remember that the lessons from this recession can be applied to future downturns, and there's no telling whether a recession will affect your lifestyle and that of your grown-up kids.
3. Higher Taxes, Higher Inflation
Pay it out to Uncle Sam.
Taxes, one of two things you canít escape in life. Unfortunately for those who are planning to retire any time in the future, taxes are only going to get higher. All of those bailouts that President Barack Obama signed during the recession are going to be paid for by taxing the American people. But, that isnít the only way taxes will chip into your retirement unexpectedly. Few people realize that working part-time during your retirement will take a huge bite out of your Social Security payments; Macko says that the government can tax you up to 85% on the benefits if you are working part-time.
Inflation may not be a problem right now, some economists are worried that it will become a serious and sudden problem after the economy recovers. In that case, itís important to keep in mind that the money you saved might not go as far by the time you retire.
4. Health Costs and Dental Care
Expect to pay for a happy, healthy you.
Health care is top of mind now that reform has been passed, but itís important that it stays on your mind well into retirement. Getting older means having a whole heap of new health expenses to worry about, and less income to pay for them. No one is sure exactly how the changes are going to affect a lot of seniors on Medicare. Although some will be helped by the closing of the prescription drug "doughnut hole", others will incur higher premiums. Either way, health care is still going to be very expensive for everyone. Itís important that you save for the chance that you will develop a chronic illness and need constant care, or for the chance that you will need to move to a nursing home.
According to a 2004 report from the Congressional Budget Office, 24% of the people who turn 65 this year will need to be in a nursing home for a year or more. One study done by the Center for Retirement Research at Boston College shows that out-of-pocket health-care expenses for a couple at age 65 could range anywhere from $197,000 to $570,000.
Another health-care woe that isnít always considered is dental work. ďAs you get older, simple fillings don't cut it any more and procedures are expensive,Ē says Frank Boucher, CFP at Boucher Family Planning in Reston, Virginia. Many retirees don't have dental insurance but, even if they do, coverage on the most expensive procedures like root canals and caps is generally limited. Implants, which can run over $4,000, usually aren't covered at all.Ē If you aren't saving, start flossing.
5. Repairs for Your Older Home
Itís Tool Time!
Unfortunately, home and car repair are things that we canít necessarily prepare for before they happen. Itís best to replace major appliances and deal with any large remodeling jobs before you retire to avoid incurring unexpected costs from these things later on. Donít forget, home repair costs will go up as your home ages. Some people choose to downsize and/or move to a cheaper part of the country to avoid high house-related costs.
If you are a two-car household, consider selling one of your vehicles once you both retire. If you can, try to sell both of your cars and buy a used car -- you will save in car registration and licensing fees this way. Also, try insuring your house and car with the same firm; you could save as much as 15% by combining plans.