Single Women and Longevity Risk Part 3: Planning for Expenses in Retirement
In Part 2 of this three-part blog series on single women and longevity risk, we discussed the importance of investing to supplement your income in retirement and minimize the risk of outliving your financial resources. In Part 3, we’ll explore why planning for expenses in retirement—both expected and unexpected—is essential when it comes to managing longevity risk.
Estimating Your Expenses in Retirement
Failing to consider and plan for the various costs you’re likely to incur in retirement can lead to a savings shortfall, increasing the risk that you’ll outlive your assets. Thus, creating a retirement budget is necessary to ensure you’re saving enough and investing appropriately.
Of course, there are always uncertainties when it comes to planning for the future. Nevertheless, with the right guidance, it’s possible to project your retirement expenses with a reasonable degree of accuracy.
For example, basic living expenses like food, housing, utilities, and clothing tend to remain relatively steady in retirement and are therefore easier to anticipate. Yet other items like healthcare, travel, and entertainment often rise significantly once you stop working.
In fact, a recent report by the Center for Retirement Research at Boston College found that in 2018, 12% of the median retiree’s total retirement income went toward medical expenses. Moreover, since 2000, the price of medical care has increased at a faster rate than the overall inflation rate.
Meanwhile, with more free time on your hands, you may wish to travel more and take longer, more expensive trips in retirement. Plus, you’re more likely to spend money on other types of entertainment once work no longer demands so much of your time.
No matter your retirement plans, it’s important to consider how your lifestyle goals will impact your budget and plan accordingly. This can help you determine what size nest egg you’ll need to retire successfully and mitigate longevity risk.
Planning for Unexpected Expenses in Retirement
In addition to the expenses we can reasonably project, others can crop up as we age and our homes, children, and spouses age along with us. Unfortunately, unexpected expenses can mess with the best-laid plans when you’re living off savings and fixed sources of income like Social Security.
Therefore, it’s best to expect the unexpected and prepare for these expenses as best you can. Here’s a list of unexpected expenses you may face in retirement:
Home Repairs & Maintenance Costs
Many Americans own their homes when they reach retirement age. (When I say “own,” I mean they own their homes outright or are still paying down their mortgage as opposed to renting.)
It’s easy to overlook or postpone home maintenance, especially if everything looks fine on the surface. But homes age just like we do, and putting off necessary repairs can become a significant financial expense down the road.
A recent personal experience drove this point home when a routine paint job turned into a major dry rot mitigation project costing tens of thousands of dollars!
When it comes to planning for unexpected expenses in retirement, here’s a best practice to prevent a surprise cost like mine: hire a professional to inspect your home for hidden problems such as dry rot, termites, mold, foundation issues, leaks, and outdated plumbing and electrical systems. Then, develop a multi-year plan to fix the problems and schedule ongoing routine maintenance.
In addition to the unglamorous fixes a home occasionally needs, it’s not unusual to grow tired of your home decor over time. You may decide to buy new furniture or appliances or update the exterior of your home in retirement, all of which can be costly.
In some cases, you may simply want your home to maintain its value if you plan to eventually sell it. For example, kitchen and bathroom styles tend to change every 10-20 years, prompting homeowners to make major updates.
Or you may need to alter your home so you can age in place comfortably and safely. While no one likes to think about the possibility of losing mobility, it’s one of the realities many of us must face as our bodies age.
Regardless of the impetuous, remodeling costs are common in retirement and can be substantial. Thus, it’s best to expect them and manage your finances accordingly.
Unexpected HealthCare Costs
The first time many retirees realize Medicare isn’t as cheap as they thought it would be is when they receive a notice from the Social Security Administration about IRMAA. IRMAA, which stands for Income-Related Monthly Adjustment Amount, is an extra charge added to your Medicare Part B and Part D premiums if your income exceeds a certain threshold.
When on Medicare, you pay monthly premiums for Part B, which covers doctor services, outpatient care, and preventive services, and Part D, which covers prescription drugs. But if you’re a high-income earner according to your tax return from two years ago, the government says, “Hey, you can afford to contribute a little more.”
So, they add an extra charge (IRMAA) to your monthly premiums. And the more you earn, the higher your IRMAA charge will be.
Also, Medicare doesn’t cover all healthcare-related expenses in retirement. You’ll still be responsible for co-pays, deductibles, and coinsurance, as well as long-term care, dental, hearing, and eye care. These out-of-pocket costs can add up quickly if you have a significant health issue or need extensive care.
Again, proper planning is essential to mitigate these costs. To avoid IRMAA, you can work with a financial planner to develop a retirement income plan that keeps your taxable income below the threshold.
In addition, you may want to consider buying a Medigap or Medicare Advantage policy to defray the healthcare costs Medicare doesn’t cover.
Medigap policies fill in the gaps in original Medicare coverage, including medical care when traveling outside the U.S. Just keep in mind you’ll still need a separate prescription drug plan (Medicare Part D).
Alternatively, Medicare Advantage (Part C) offers an “all-in-one” alternative to original Medicare. However, these plans are generally in HMOs or PPOs, which may limit your access to certain healthcare professionals or facilities.
Another common misconception is that Medicare covers long-term care costs. It doesn’t. This can be problematic, since most older adults will likely need long-term care during their lifetimes.
In fact, the U.S. Department of Health and Human Services estimates that 70% of those turning 65 this year will eventually need long-term care. Meanwhile, women are more likely to need long-term care than men and for a longer duration, according to data from Morningstar.
These services can be costly—typically thousands of dollars a month in expenses. Unfortunately, long-term care insurance is also expensive, and the rigorous eligibility requirements put it out of reach for many.
If you qualify for long-term care insurance and can afford it, you may want to consider your available options, including hybrid policies that include a life insurance component. Otherwise, self-funding long-term care by saving and investing enough money during your working years is likely your best option.
It’s not uncommon for adult children or other relatives to need financial help occasionally. These requests can be tough to negotiate, especially if your loved ones don’t understand the strain an unexpected loan or gift can have on your finances in retirement.
Although discussing money is taboo in many families, it’s wise to be transparent about your financial circumstances and create boundaries around financial requests. If this isn’t a viable option, be sure to include potential loans and gifts when planning for expenses in retirement.
Losing a Spouse
Morningstar estimates that 90% of women will manage assets on their own at some point during their lifetimes. Many women experience this for the first time in retirement due to the death of a spouse.
Losing a spouse can be emotionally devastating, no matter your stage of life. Yet failing to prepare financially for this possibility can make an already challenging situation even worse.
If you depend on your partner financially, there are steps you can take now to safeguard your financial independence if you unexpectedly lose them. For example:
- Consider purchasing a life insurance policy to replace lost income or cover funeral costs and other outstanding expenses.
- If your spouse has a pension, explore your survivorship options before retirement to ensure continued payments.
- Understand Social Security survivors benefits, especially if your spouse has the higher earnings record.
- Consult an estate-planning attorney to ensure your estate plan is current and organized for a seamless transition of assets.
With Proper Planning, Single Women Can Minimize Longevity Risk and Thrive Financially in Retirement
Planning for expected and unexpected expenses in retirement is crucial for maintaining financial stability and peace of mind. Yet minimizing longevity risk requires more than managing your expenses. Meeting your savings targets and investing for your long-term goals is also essential.
Remember, the earlier you start preparing financially for retirement, the better off you’ll be long-term. Moreover, you don’t have to go it alone. A fiduciary financial planner like Curtis Financial Planning can provide expert guidance and help you implement the right strategies to secure your financial future. To learn more, please explore our services and free financial planning resources.