Unpleasant Surprises in Retirement: Not What You Think
Among costly shocks most don’t plan for: dental work, home repairs
Our brain is ill-equipped to handle what it cannot foresee, the result of something known as status quo bias, an assumption that every tomorrow will pretty much look like every today.
Problem is, life constantly changes. Most changes are small and either unnoticed or easily managed. A few, however, are substantial and radically disrupt our lives.
For retirees, these disruptions can create debilitating financial difficulties that can all but ruin retirement.
What we’re talking about here are unexpected financial shocks that we don’t know to prepare for. Not run-of-the-mill expenses like, say, a higher auto insurance premium or a property tax increase. We’re talking about large events that stress a nest egg. They’re more common than you might imagine.
Indeed, the Society of Actuaries’ Committee on Post-Retirement Needs and Risks has been working for two decades to better grasp how retirees manage financial issues, as well as the real risks they confront, after a working career. The results: Nearly one in five retirees, and nearly one in four retired widows will experience four or more financial shocks.
Unexpected healthcare costs get a lot of attention, but the actuaries found that’s typically not the biggest bugaboo. Retirees who have Medicare and a supplemental plan (about 81% of them, according to Kaiser Family Foundation) typically have their medical bills well covered.
Instead, the actuaries report that, based on focus groups and interviews with those retired at least 15 years, the most common financial shocks are major home repairs (28% of retirees) and major dental costs (24%). The latter occurs because Medicare and most supplemental plans have weak or no dental coverage.
Other significant shocks include widowhood, divorce during retirement, long-term care expenses and adult children needing financial assistance.
The actuaries’ research suggests retirees are resilient, making necessary adjustments to their spending to cover the shocks. But those adjustments are often substantial, leading to a degraded lifestyle.
More than a third of retirees saw their assets decline by 25% or more. Roughly 10% had to reduce monthly spending by 50% or more. All of which underscores one of the more significant shortcomings of retirement planning: preparing for what you do not know to expect.
Will you need $20,000 of emergency dental work in a few years? Will you and your spouse have to drastically reduce the assets on which you live? Will a hailstorm in 2023 damage your roof, allowing rain to seep in over time and rot walls and promote mold, an expense of tens of thousands of dollars that most homeowners’ insurance policies typically don’t cover? Will an adult child need financial help? (Pew Research Center reported in 2016 that 32.1% of adult children live with parents.)
Surviving such events means, of course, preparing for them, sometimes after you’ve retired. Building an emergency fund as large as possible is the obvious first step. That will help defray the costs of a new roof or a dental emergency.
Some costs, though, are beyond all but the biggest emergency fund. Long-term care costs for nursing homes, assisted-living centers or home healthcare regularly run between $3,600 and nearly $8,000 a month, according to LongTermCare.gov. That can quickly deplete emergency savings and an entire nest egg. Neither Medicare, Medicaid nor traditional health insurance foots those bills. (Medicaid will pay for a nursing home, but only after you’ve spent yourself into indigency.)
The solution here is to own a long-term care policy, if your budget can cover the premiums.
Basic term life insurance is an option to protect against a spouse’s sudden death and is surprisingly cheap.
Having a line of credit available can also help you navigate a financial shock. Most lines of credit are structured around home equity, and these days they charge interest rates of between 4.3% and 6.5%. That’s substantially less than credit cards,which are too often deployed in a financial emergency. Just be sure you establish a credit line before you need it.
Finally, to the degree you’re physically able, a side hustle can help you cover comparatively small unexpected costs. These days, you can find relatively easy side-hustle opportunities all over the place: customer service representative working from home, mobile notary public, delivery driver using your own car and so on. Depending on the effort you put into it, a gig like these can generate a few hundred to a few thousand dollars monthly.
However you approach it, prepare for an unwelcome surprise soon. Because actuarially speaking, chances are pretty good that a black swan is circling somewhere nearby.