7 Retirement Surprises That Can Wreck Your Finances

Retirement should be a time to enjoy life, but without proper planning, unexpected expenses can throw even the best-laid retirement plans off course. Many people focus on everyday costs like housing, food, and transportation when preparing for retirement but forget to plan for surprise financial shocks. These surprises can significantly impact your savings and lifestyle if you’re not prepared.

Here, we break down seven unexpected retirement expenses that can disrupt your financial stability—and offer solutions to help you prepare.

1. Hidden Housing Costs

You might think that once your mortgage is paid off, your housing expenses will be minimal. But homeownership comes with hidden costs that can sneak up on you. Home repairs, maintenance, and unexpected renovations are some of the most common surprises retirees face. Issues like a leaky roof, faulty plumbing, or a broken furnace can require thousands of dollars in repairs.

If you plan to age in place, you might also need to make modifications to your home as you get older. Ramps, grab bars, stairlifts, and wider doorways may be necessary to ensure your safety and comfort as your mobility decreases. These modifications aren’t cheap and can quickly add to your housing costs.

How to Prepare: To avoid getting blindsided by home expenses, budget about 1% of your home’s value each year for repairs and maintenance. Consider having a professional home inspection every few years to identify potential issues before they become costly problems. If you plan to stay in your home long-term, start planning for any necessary modifications now, so you’re not scrambling to make changes later.

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2. Health Care Costs Beyond Medicare

Many retirees mistakenly believe that Medicare will cover all their healthcare needs. While Medicare helps with hospital stays and doctor visits, it doesn’t cover everything. Routine dental care, hearing aids, and vision care are not included in basic Medicare, and you’ll need supplemental insurance for that. Plus, even with Medicare, you’ll still face out-of-pocket expenses like deductibles, co-pays, and prescription drug costs.

The older you get, the more health issues you’re likely to face, and healthcare costs can add up quickly. If you don’t plan for these expenses, you could find yourself dipping into your retirement savings to cover them.

How to Prepare: Consider signing up for a Health Savings Account (HSA) while you’re still working. Contributions to an HSA are tax-deductible, and withdrawals are tax-free when used for qualified medical expenses. This can be a great way to save for future healthcare costs, including Medicare premiums, dental work, and prescriptions.

3. Long-Term Care Costs

Long-term care is one of the biggest surprises retirees face. Most people don’t expect to need long-term care, but statistics show that nearly 70% of retirees will require some form of it during their lifetime. Whether it’s in-home care, assisted living, or a nursing home, long-term care can be incredibly expensive. The national average for a private room in a nursing home is over $108,000 per year, and those costs are only rising.

Many retirees don’t have enough savings to cover these costs, leaving them vulnerable to financial strain. Long-term care insurance is an option, but it’s often expensive, and many people don’t purchase it until it’s too late.

How to Prepare: If you’re in your 50s or early 60s and in good health, now is the time to make sure you have a long-term care plan, which can include purchasing long-term care insurance. Premiums are generally more affordable when you’re younger and healthier. If long-term care insurance is not of interest or too costly, consider alternatives to funding long-term care such as tapping home equity or creating a savings plan specifically for long-term care expenses. You may also want to explore hybrid insurance policies that combine life insurance with long-term care benefits.

4. Financial Support for Adult Children

It’s natural for parents to want to help their children, especially during tough times. Whether it’s helping with a down payment on a home, covering college tuition, or assisting with unexpected medical bills, many retirees find themselves dipping into their savings to support their adult children. However, this can quickly deplete your retirement funds, especially if the financial support becomes long-term.

In fact, studies show that nearly half of parents who financially assist their adult children say it jeopardizes their retirement savings. It’s important to set boundaries and carefully evaluate how much financial support you can offer without harming your own financial future.

How to Prepare: Before offering financial help, assess your own budget and savings. Make sure that any assistance you provide won’t compromise your long-term financial security. If you do decide to offer support, set clear boundaries and expectations with your children. Decide whether the money will be a gift or a loan and put any loan terms in writing to avoid misunderstandings down the line. If you’re unable to provide financial support, offer guidance in other ways, such as helping them create a budget or explore other resources.

5. Losing a Spouse

Few things can shake your financial foundation as much as losing a spouse. Beyond the emotional toll, the loss of a spouse often results in a significant drop in household income. This can happen if you or your spouse relied on their pension, Social Security benefits, or other forms of income. If you don’t plan for this potential loss, it could leave you struggling to pay bills and maintain your lifestyle.

Social Security benefits are especially important to consider. Once one spouse passes away, the surviving spouse can claim the deceased spouse’s benefit, but they will only receive the higher of the two benefits, not both.

How to Prepare: Life insurance can be a valuable tool to help cushion the financial impact of losing a spouse. Review your life insurance policies regularly and ensure they are sufficient to cover any gaps in income. If you or your spouse has a pension, explore survivorship options to ensure that payments continue after one spouse passes away. Delaying Social Security benefits can also increase the amount your surviving spouse receives.

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6. Inflation’s Bite on Fixed Incomes

Inflation is a hidden danger for retirees, especially those living on fixed incomes. Over time, the cost of goods and services rises, but your income may not. This can erode your purchasing power, making it harder to cover basic expenses like food, utilities, and healthcare. Even a modest inflation rate can significantly impact your savings over a 20- or 30-year retirement.

If your retirement budget doesn’t account for inflation, you may find yourself running out of money sooner than expected.

How to Prepare: When creating your retirement plan, be sure to factor in inflation. A good rule of thumb is to assume an inflation rate of 2.5% to 3.5% per year, though rates can vary. You may also want to consider investing in assets that provide some protection against inflation, such as stocks, bonds, or real estate. Diversifying your portfolio can help you maintain your purchasing power as prices rise.

7. Unexpected Taxes

Many retirees are surprised to find that they still owe taxes in retirement. Withdrawals from traditional IRAs, pre-tax 401(k)s, and other non-Roth retirement accounts are considered taxable income, and depending on how much you withdraw, your tax bill could be higher than expected. Additionally, a portion of your Social Security benefits may be taxable if your total income exceeds certain thresholds.

Failing to plan for these taxes can leave you with a hefty tax bill and may force you to withdraw more from your savings than you originally planned.

How to Prepare: Work with a tax advisor to develop a tax-efficient withdrawal strategy. Consider converting some of your traditional IRA or pre-tax 401(k) funds to a Roth IRA, which may allow for tax-free withdrawals in retirement. Also, be sure to set aside funds each year to cover taxes on your retirement income. Planning for taxes can help you avoid unexpected tax bills and ensure your retirement savings last longer.

Bottom Line

Retirement is a time to enjoy life, but it’s important to prepare for the financial surprises that can come your way. From hidden housing costs to long-term care expenses, these unexpected challenges can significantly impact your savings and quality of life. By planning ahead and building flexibility into your retirement plan, you can safeguard your financial future and ensure that your retirement is everything you’ve dreamed of.

Don’t wait until it’s too late. Speak with a certified financial planner today to review your retirement plan and ensure it accounts for these hidden risks. A little preparation now can help you enjoy a worry-free retirement later.

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Reference

Rappaport, A. (2017). Shocks and the Unexpected: An Important Factor in Retirement. Retrieved from the Society of Actuaries website: https://www.soa.org/research/topics/aging-ret-res-report-list/

Genworth. (2021). Cost of Care Survey 2021. Retrieved from Genworth website: https://www.genworth.com/aging-and-you/finances/cost-of-care.html

Schwab Center for Financial Research. (2023). 5 Surprise Retirement Expenses. Retrieved from Charles Schwab website: https://www.schwab.com/resource/5-surprise-retirement-expenses

U.S. Department of Health and Human Services. (2022). How Much Care Will You Need? Retrieved from HHS.gov website: https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

Bankrate. (2019). Half of Parents Financially Helping Their Adult Children Say It's Putting Retirement Savings at Risk. Retrieved from Bankrate website: https://www.bankrate.com/personal-finance/saving/parents-financially-helping-adult-children-risk-retirement

Genworth. (2021). How Much Does Nursing Home Care Cost? Retrieved from Genworth website: https://www.genworth.com/aging-and-you/finances/cost-of-care.html

Fidelity. (2024). Retiree Health Care Cost Estimate. Retrieved from Fidelity website: https://www.fidelity.com/viewpoints/retirement/retiree-health-care-costs

Employee Benefit Research Institute. (2024). 2024 Retirement Confidence Survey. Retrieved from EBRI website: https://www.ebri.org/surveys/retirement-confidence-survey