Learning about the common financial surprises that occur during retirement is an excellent way to try to protect nest eggs, says the article “The Expenses People Often Forget When They Plan for Retirement” from The Wall Street Journal.
A study by the Society of Actuaries found that one in five retirees and one in four widows experienced four or more financial shocks during retirement. That’s a lot of surprises for people living on fixed incomes. The good news is that the study also revealed that many older adults who experienced a stealth surprise appear to have bounced back.
Retirees are resilient, and most are good about making adjustments to their budgets to overcome their surprises. However, being prepared for these financial shocks is even better. Here are some of the more common hidden costs of retirement:
Replacement costs for big ticket items. A new furnace, a new car, or a new roof are all expenses that come up when you’re working. They don’t stop because of retirement. Many retirees underestimate their longevity and overestimate big ticket items that need replacement.
Relatives in need. This pinch can come from older parents or relatives and younger family members who find themselves in a financial crisis. An adult child who loses their job or goes through a divorce or a grandchild who needs help with tuition are some of the typical examples. Can your nest egg sustain their needs, or do you need to say no? Can other family members help?
Required distributions and taxes. Most people know that they will need to start taking withdrawals from tax-deferred accounts upon reaching 70½, but they don’t often understand the larger picture. The distribution may push the couple into a higher tax bracket, and increase Medicaid Part B premiums, which are tied to annual income.
It’s not possible to anticipate every single surprise cost that will come up during retirement. However, there are a few things that can be done. First, try to avoid any major expenditures during the first five years of retirement. That’s when nest eggs are most vulnerable to bear markets. Next, while you are saving for retirement or making budgets, include money for home repairs and upkeep.
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Reference: The Wall Street Journal (Oct. 17, 2019) “The Expenses People Often Forget When They Plan for Retirement”