Making Your Money Last

How to Budget for Unexpected Costs in Retirement

Planning for surprise expenses can keep your retirement on track.

When you draw up a retirement spending plan, you'll find no shortage of budget worksheets. But they're unlikely to include a line item for the adult child who lost a job and needs a huge cash infusion. And have you planned to shell out $10,000 for major dental work in the same year that your dog needs a $5,000 total hip replacement?

These surprise retirement costs can include out-of-left-field expenses, such as an aging parent who needs financial help and a dip in the housing market in the year you hoped to downsize. And then there are those one-time expense shocks that you should anticipate but pop up suddenly, such as the cost to replace a leaky roof. A monthly line item for house maintenance won't account for such a sudden spike in expenses.

These blind-side costs can easily derail what you thought had been a well-planned retirement. But you can head off financial setbacks if you "expect the unexpected," says Stuart Ritter, senior financial planner at T. Rowe Price. "The reality is that there's always something that happens. If you've got it worked into your budget, you will have the resources."

There are several ways to go about planning for what retirement expert Henry Hebeler calls the OSIFs, for "Oh, shoot, I forgot" items, such as the new car. And then, he says, there are the "unk unks"—for unknown unknowns, such as a house fire or flood.

The best course is to set up a cash reserve to pay for the large surprise expenses. Hebeler suggests setting aside 10% of your savings. And Ritter says there should be an annual budget line item "dedicated to one of these funky things happening."

You don't have to set aside the total amount at once. Every year before retirement—or even during retirement—you can reserve some money. "You make sure your needs are fully funded but that your wants are funded 90%," says James Nichols, head of retirement income and advice strategy for Voya Financial (formerly ING U.S.). The other 10% can be set aside.

Nichols says planning for the "bump in the road" helps you figure out what you may be prepared to give up. Perhaps you're willing to forgo a European vacation every five years in case a family member needs help. "If you don't go through the exercise early, it becomes a more difficult decision when it comes time to cut a check for your daughter," he says.

Saving for Capital Expenses

Hebeler suggests a "replacement reserve" for capital expenses, such as house painting and a new car, furnace and refrigerator. "You do not include the reserves in calculating your regular retirement expenses," says Hebeler, author of Getting Started in a Financially Secure Retirement (Wiley, $29).

Say your roof would cost $10,000 to replace today. You estimate that the roof has a life of 20 years, and it is five years old. Ideally, you have set aside $2,500 and will need to plan for $500 a year for 15 years. Hebeler assumes that inflation will equal investment returns. For help with your calculations, use Hebeler's free "replacement budgeting" program at www.analyzenow.com.

Health care is among the top unexpected expenses that retirees cited in a survey by Voya, Nichols says. Retirees "do not appreciate the cost of health care," he says. "Perhaps they're not clear on what Medicare covers." Traditional Medicare does not cover dental, vision or long-term care. Be sure to buy a Medigap supplemental insurance policy to cover many of the costs that Medicare does not cover. You can get an idea of what your dental costs could be by asking your dentist for the typical expenses of older patients.

As for your parents, try to assess their financial situation before you retire. Perhaps you can hire a financial planner to help aging parents "get some sense of how much savings they need for their waning years," Hebeler says.

Haven’t yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
April 14, 2021
The Wrong Way to Achieve Wealth
personal finance

The Wrong Way to Achieve Wealth

For some down-to-earth, basic advice on money and life, I have a book to recommend: “Your Total Wealth: The Heart and Soul of Financial Literacy.”
April 17, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021.
April 14, 2021

Recommended

The Perfect Storm for Retirees
retirement planning

The Perfect Storm for Retirees

Today’s retirees could face a perfect storm because they are living longer and spending more time in retirement, while at the same time losing access …
April 18, 2021
Social Security Earnings Tests: 5 Things You Must Know
social security

Social Security Earnings Tests: 5 Things You Must Know

If you’re still working and claim Social Security early, your benefits could be reduced, at least temporarily.
April 14, 2021
What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid
retirement planning

What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid

Many federal workers saving for retirement in TSPs get tripped up by these common pitfalls. To help maximize your own savings, make sure you steer cle…
April 14, 2021
How to Retire Well During Difficult Times
retirement planning

How to Retire Well During Difficult Times

When the financial environment is challenging (like now) it’s important to plan ahead and avoid some all-too-common retirement mistakes.
April 11, 2021