Planning for Irregular Expenses in Retirement

Most pre-retirees I meet with for the first time have a fairly good estimate of the regular monthly expenses. However, the area that is hard to predict and plan for is the unexpected costs. One exercise that I like to do that brings clarity to this is to review actual expenses for the past few years. We often find that irregular expenses are the culprits – helping a daughter with her car, an HVAC replacement, or a dental procedure.

It can be tempting to assume that these expenses will mostly vanish in retirement, but they don’t. These one-off financial obligations can put a significant dent in your retirement savings if you're not well-prepared. While there can be a lot of surprise expenses, I found that they typically fall into four key areas. 

Helping Family 

With the rising costs of education, housing, and other life events, you may find yourself wanting to provide financial assistance to children or other family members. Consider what major life events those closest to you are likely to experience in the next 10-20 years and reflect on if that is something you want to help with.  

To plan for helping family: 

Create a family assistance fund: You set aside a portion of funds for this purpose. Some like to have a monthly or annual budget for more regular giving while others prefer one big large pot of money set aside. As something comes up, you take it from that bucket, and when the money is gone, you stop. In order to do this well, it’s important to establish clear boundaries with your family by communicating the extent of your financial support.  

Home Maintenance 

Home maintenance expenses, and big ones at that, are an unfortunate part of home ownership. Whether it's a leaking roof, a broken appliance, or necessary renovations, home maintenance costs can quickly add up.  

To plan for home maintenance: 

Budget for repairs and upkeep: While this figure varies by location and type of home, a good rule of thumb is $1 per SQFT of home per year. For a 2,400 sqft home, you would budget $2,400/year or $200/month. Keep in mind that this is separate from routine maintenance that you can plan for (lawn service, regular HVAC servicing, etc). Most years you will spend much less than that but every few years there will be a big expense. So, to do this well, it’s important to allow these funds to accrue over time. 

Budget for home renovations: Consider what changes you may want to make to your home over time. Again, this is highly variable depending on location and the type of home you have, in addition to your personal preferences.  

Healthcare 

While you may have Medicare or other health insurance coverage, out-of-pocket costs can still be significant.

To prepare for healthcare-related expenses: 

Medicare Supplemental Insurance: Invest in a Medicare supplemental insurance plan to cover co-pays, deductibles, and other costs that may not be covered by basic Medicare. 

Set aside funds for elective healthcare: Even with a good supplemental plan, you might find some expenses not covered. Oftentimes, dental-related procedures can be a massive expense not covered by Medicare. While there may be minimal coverage in some plans, most have very low maximum benefits of $2,000-$3,000/yr, and there are a number of common dental procedures that run 3-5x that cost.  

Long-Term Care 

Long-term care is an area often overlooked in retirement planning, but it's a critical aspect of financial security. The cost of long-term care, whether at home or in a facility, can be substantial.

To prepare for long-term care expenses: 

Long-Term Care Insurance: Consider purchasing long-term care insurance to provide coverage for nursing home care, assisted living, and in-home care services. However, keep in mind them premiums can be expensive and often rise over time. 

Self-Funding: For many, they may prefer to save the cost and not purchase insurance. If you choose not to purchase insurance, create a dedicated savings plan for long-term care expenses. Be sure to factor this into your overall retirement budget.  

There will be some irregular expenses that fall outside these four main categories, but most can be planned for by thinking ahead and using sinking funds. Planning for irregular expenses in retirement is essential to ensure that you can enjoy this phase of life with less financial stress. By incorporating a few of these strategies into your retirement planning, you can fill some major gaps in your retirement expense projections. 

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.