Retirement can be a tricky time, financially and emotionally.
It’s not easy to give up the routine of a day job in favor of endless free time, and making up for lost paychecks when you leave work could make surprise expenses much more difficult.
But financial shocks are also not uncommon. According to a recent survey by the Society of Actuaries, 20% of retirees and 35% of pre-retirees have experienced one.
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You might be able to plan for some retirement shocks. Here are four to keep on your radar.
1. Health care costs
It shouldn't be a secret that you'll need to spend money to take care of your health in retirement. But the amount it might cost could surprise you.
Fidelity says that the average 65-year-old in 2024 will spend $165,000 on health care throughout retirement. However, Fidelity also found that Americans estimate their retirement health care costs at $75,000 — less than half of Fidelity's calculations.
The reality is that there’s no preset formula for calculating future health care expenses. A lot will depend on your personal health, your prescription needs and your Medicare plan. But it’s better to overestimate than underestimate your health care spending.
It’s also a good idea to reserve health savings account (HSA) funds for retirement, despite being able to use them earlier in life. HSA withdrawals for qualifying medical expenses are tax-free. At age 65, non-medical HSA withdrawals are available penalty-free. If you carry a large HSA balance into retirement, you really can’t go wrong.
2. Long-term care
An estimated 70% of U.S. adults who survive to age 65 will need some amount of long-term care in their lifetime. But the costs involved could be catastrophic.
Genworth's most recent cost of care survey puts the average annual cost of a home health aide at $77,792. For an assisted living community, the annual price tag is slightly lower at $70,800.
Then there's nursing home care. With an average price tag of $111,325 for a shared room and $127,750 for a private room, even a brief nursing home stay could empty a moderate-income retiree’s bank account.
Planning how you'll pay for long-term care is essential. It could involve talking to family members about providing care later in life, buying an annuity or life insurance, setting up a QLAC (qualified longevity annuity contract) IRA or buying long-term care insurance ahead of retirement to help cover future costs. If you're wealthy, you might be able to "self-insure" by paying for long-term care with your investment income.
Medicare does not typically cover the cost of long-term care. For older Americans with limited savings, Medicaid usually pays for this care. The current administration has recommended cuts to Medicaid, so long-term care planning is even more critical.
3. Home repairs
Homeowners are often advised to budget 1% to 4% of their property’s value for upkeep and repairs. But that guidance applies to general maintenance — not large repairs such as replacing a roof or HVAC (heating and air conditioning) system.
If you’re staying in the home you lived in during your working years, by the time you reach retirement, that home will be much older. Chances are, repairs will be inevitable. To prepare, make sure you have a nice-size cash emergency fund at the ready.
Retirees are often advised to have one to two years’ worth of expenses in cash for protection against negative market events. You might want to stick to the higher end of that range so you’re covered when home repairs come up.
Even if you’re used to making minor home repairs yourself, as you age, that could get more difficult. Professional plumbers, carpenters and other home repair experts are another expense for which you’ll want to save and budget.
4. The cost of aging in place
It was once fairly common for older Americans to downsize or relocate in retirement. These days, it's an important question: Do you want to age in place or move? A growing number of people opt to stay in the homes they know and love.
AARP reports that 75% of Americans age 50 and older want to age in place, and 73% hope to stay in their communities. However, aging in place often means making changes for safety reasons, and retrofitting a home could get quite expensive.
Fixr says homeowners spend an average of $3,000 to $15,000 to remodel their homes to age in place. But the costs you incur will depend on the scope of the work that needs to be done.
Installing a walk-in shower will cost more than simply installing a grab bar on a current one. Adding lighting to kitchens, bathrooms, and hallways is another expense that could add up if there’s a large area to cover.
If you know ahead of retirement that you’d prefer to live out your days in your current home, save for eventual renovations. You might want to bring in a contractor to give you some quotes so you’ll have a sense of the costs you could be dealing with.
Be sure to explore how technology can help you age in place, as well. The more details you have, the better job you can do saving ahead of retirement, so you’re able to make whatever changes are necessary to create a safe living environment.
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