Watch Out For These Expenses in Retirement

By Emily Guy Birken

When was the last time you had an unexpected expense that blew your monthly budget?

If you’re like most people, you probably remember most months as typical, without any major budget-busting purchases. But it’s likely that if you go back over your accounts for the past year, you’ll find each and every month included some sort of unexpected expense, for anything from a replacement computer to a wedding present to theater tickets for your anniversary.

According to Abigail B. Sussman and Adam L. Alter, authors of a study on spending patterns, what’s going on here is a form of mental accounting. We have a tendency to view exceptional costs as if they exist somewhere outside of our budget, and so we have trouble remembering to account for those costs and we underestimate how much we spend on these items by a whopping 40%.

For instance, you might think of the damaged tire you had to replace as a one-time expense — which it is, if you’re only looking at it as the result of one unfortunate parking lot encounter. But how much irregular car maintenance do you need to take care of each year?

Forgetting to budget for such expenses while you are working might be nothing more than annoying, since your income can weather these expenses. But failing to plan ahead for these unexpected expenses can be disastrous for retirees on fixed incomes.

How to Plan for Unexpected Expenses in Retirement

As you plan ahead for your retirement, make sure you account for these unexpected expenses in your retirement budget:


According to Ashlea Ebeling of, 48% of pre-retirees believe that they will only need about $50,000 set aside for healthcare costs in retirement. But Fidelity, which calculates average healthcare costs for retiring couples each year, estimates that a 65-year-old, Medicare-eligible couple retiring in 2015 would need $245,000 in today’s dollars to cover their healthcare costs.

That shocking price tag is part of the reason why healthcare tends to be the granddaddy of retirement budget busters. Retirees are also often caught flat-footed by medical expenses because they believe that Medicare covers more than it does. Not only does Medicare not cover things like nursing home stays or hearing aids, but there are many out-of-pocket costs to Medicare, from the monthly premium to co-insurance amounts, that take retirees by surprise.

There are several ways of mitigating the cost of healthcare, whether you are still in the retirement-planning stages, or you have already started your transition into retirement:

1. Calculate Your Specific Healthcare Needs

Taking the time to consider what kinds of ailments you might face in your later years may not be as fun as planning a summer vacation, but it can help you financially prepare for the medical needs you might have in the future.

Specifically, AARP offers a healthcare cost calculator that asks for your current age, your projected retirement date, projected life expectancy, height, weight, health habits, and any health concerns or diseases that run in your family. With this information, the calculator gives you an estimate of your total healthcare costs in retirement, broken down into the amount that will be covered by Medicare and the amount you will have to pay out of pocket.

This ballpark estimate should be more illuminating for you than the Fidelity estimate of $245,000 per couple, since it is tailored to your specific situation.

2. Take Excellent Care of Yourself

This may seem like odd financial advice, but one of the best things you can do for your financial health is take care of your physical health. While healthy living can’t prevent every medical disaster, preparing yourself for a retirement free of preventable, chronic (not to mention expensive) health problems is a wonderful gift to yourself and your family.

3. Open a Health Savings Account

For some pre-retirees, opening one of these accounts will offer a good strategy for healthcare planning. Health Savings Accounts (HSA) are similar to traditional IRAs, in that they allow you to put aside pre-tax money for future healthcare costs. The money in the HSA grows tax-free, and withdrawals for qualified medical expenses are not taxed.

However, you must be signed up for a high-deductible health plan in order to qualify for an HSA. This means that getting sick prior to retirement could either cost you a great deal out of pocket, or cause you to wipe out the funds in your HSA before you retire.

4. Open a Roth IRA

The Roth version of the Individual Retirement Account (IRA) is funded with post-tax dollars, which means it grows and can be withdrawn tax-free. This makes it an ideal place to set aside money you have earmarked for healthcare spending, since withdrawals can be used for any purpose, as long as you have held the account for five years and have reached age 59½ before you make a withdrawal. In addition, if your health remains good, there is no mandatory withdrawal on Roth IRAs, unlike their traditional counterparts, which means you can hold onto the money in your Roth if you don’t need it.

5. Look into Long-Term Care Insurance

Long-term care refers to the sort of non-medical daily living care that many elderly individuals need. This includes everything from nursing home stays to home help with things like eating, bathing, dressing, and mobility. The average cost of a nursing home is $77,000 per year (or about $212 per day), and the average nursing home stay is just under three years.

Penelope Wang of Time magazine reported in 2014 that a staggering 70% of Americans over the age of 65 will need long-term care, and neither Medicare nor private health insurance covers this care.

There are three options for paying for this care:

  • Medicaid: Those with limited assets can spend down those assets in order to become eligible for Medicaid, which does cover long-term care. Once you have $2,000 or less in your own name, you become eligible for Medicaid.

  • Self-pay: Those who are wealthy will often pay out of pocket for their own care. Considering the cost of long-term care insurance, individuals with a large enough nest egg can be better off forgoing the insurance and paying for themselves should the need arise.

  • Long-Term Care Insurance: About 30-40% of middle-income retirees would benefit from purchasing a long-term care insurance policy. As of 2012, the average annual cost of long-term care insurance for a 60-year-old couple was $3,381 combined, with a benefit of $164,000 each (or $328,000 combined).

While long-term care insurance can be expensive, it can be worthwhile to look into it and weigh the costs.

Replacing Your Durable Goods

Everything from your car to your laptop to your dishwasher has a finite lifespan — but it can be very easy to forget that fact. We often view these purchases as unexpected when we could easily see them coming.

For instance, you may think that a broken computer is nothing you can plan for, but even if you don’t know the exact date that your laptop will shuffle off this mortal coil, you can be certain that a computer seeing its third presidential campaign can’t last too much longer.

The trick to keeping the cost of replacing durable goods from derailing your retirement budget is to recognize the typical lifespan of these items.

Specifically, retirement expert Henry K. "Bud" Hebeler recommends that people include a “replacement reserve” for these sorts of expenses. For instance, if you know that you’d need $15,000 in today’s dollars to replace your roof, and that a roof generally lasts about 25 years, then you could plan on setting aside $600 per year toward that inevitable expense. Hebeler offers a free replacement budgeting worksheet on his website Analyze Now to help you make these calculations for every type of good you might need to replace in retirement.

If you are already retired and staring down some hefty replacement costs that you have not planned ahead for, it could be time to embrace your inner cheapskate. Taking the time to shop around, explore used and refurbished options, or learning to live without are all perfectly valid ways of keeping your replacement costs from destroying your budget.

Upgrading Your Home for the Older You

If you plan to stay in your current home, don’t forget to factor in the potential costs of making accommodations for decreased mobility as you age. For instance, I know a couple that has already decided that they will set up their bedroom in what is currently the dining room should they no longer be able to navigate the stairs to their second floor.

The cost of upgrading your home to meet your changing needs will necessarily depend upon your specific physical needs and the current layout of your home. The couple intending to bunk in their dining room will only need a few movers to create a more livable house if they lose some mobility. But more major renovations, such as a bathroom remodel or ramp installation, can be very costly. The website HomeAdvisor, which helps homeowners calculate the average cost of various types of home improvement, estimates that remodeling for disability accommodations can cost as much as $20,000.

The potential cost of upgrades can be an excellent reason to look into downsizing. Not only can it be possible for you to move into a new home that is already set up to meet your mobility needs, but downsizing can also potentially offer you reductions in property taxes, utility costs, and maintenance costs.

Planning and Flexibility Will Keep Your Retirement Secure

Life is full of surprises. The best way to keep retirement surprises from hurting your bottom line is to plan for things that are foreseeable and others that may not be. Start by looking back on how much you have spent on "unexpected" expenses in the past. Add on the average anticipated expenses awaiting you according to experts and calculators.

And finally, commit to being a flexible retiree so you can roll with the punches you don’t anticipate. aboutLife can help you create a personalized retirement plan to account for regular and unexpected expenses.