Even the most careful retirement planning cannot account for everything, because life is full of twists and turns. Unexpected circumstances like shifting markets, changing health, or the evolving needs of your family can sneak in to disrupt your budget and lifestyle. But preparing for these events in advance helps ensure they won’t chip away at your nest egg.
Proverbs 21:5 says, “The plans of the diligent lead to profit, as surely as haste leads to poverty.” While this verse does not promise good planning will eliminate surprises, it does emphasize the wisdom found in being proactive. Diligence can keep us from being caught off guard when challenges inevitably arise, and starts by familiarizing ourselves with the four most common unexpected costs that pop up in retirement: inflation, longevity, hidden costs, and those related to healthcare.
1. Inflation
Inflation is a secret budget-killer. It slowly erodes buying power over time by quietly increasing the cost of goods and services like eggs, gas, milk, and even your utilities. While many organizations provide a periodic “cost of living” pay increase to help employees offset the rising costs of daily goods, individuals on a fixed income simply have to pay more from their set budget.
Here’s an example of how it works. Let’s say you’re living on a fixed income of $50,000 a year and inflation averages 3% annually. This means that in 20 years, your income will only be able to buy about $27,600 of what you can purchase today. The gap is stark, but you can combat it by building an “inflation buffer” into your retirement plan on the front end. Many people do this with the help of growth-oriented investments or conservative withdrawal rates, but our team can help you determine which strategy is right for your budget.
2. Longevity
The good news is that people are living longer than ever. The bad news is that because your retirement savings have to be stretched out over decades, it’s also more possible to outlive them. According to the Social Security Administration, a woman who is 65 years old today can expect to live, on average, until about 87, and a man until about 84… but many will live into their 90s.
This trend toward increased life expectancy means we need to employ smart strategies to ensure our funds survive with us. These could include:
- Delaying retirement to maximize Social Security benefits
- Supplementing your income through part-time or freelance work
- Exploring annuities or other guaranteed income sources to cover essentials.
3.Hidden or underestimated expenses
As stated above, even the most judicious budgeters can’t possibly anticipate every incident that could pop up. Home maintenance and repairs, helping your adult children, or an uptick in bills can drain your monthly budget more quickly than planned. And sometimes it’s just a result of having too much fun! The flexibility of retirement can easily lead to “lifestyle creep” when the costs associated with spontaneous trips or new hobbies start to add up.
One way to prepare is to create a “surprise expenses” fund within your retirement portfolio to cushion the impact of those unplanned moments without derailing your budget.
4. Costs for health and long-term care
Healthcare is one of the largest retirement expenses. In fact, Fidelity estimates that a 65-year-old person retiring today will need roughly $165,000 for medical costs alone (not including long-term care), which equals $330,000 a couple.
And while Medicare currently covers many routine expenses, it doesn’t pay for most long-term care services. To address this gap, retirees often:
- Purchase long-term care insurance
- Contribute to Health Savings Accounts before retirement for tax-advantaged medical savings
- Consider hybrid life insurance policies that provide long-term care benefits.
As people continue living longer, long-term care becomes more of a necessity. Planning ahead in this area will not only ensure you’ll get the help and attention you need – it will also provide comfort and support for your loved ones.
Plan for the unexpected
As you navigate retirement, surprises are sure to arise, but careful planning will ensure they don’t impact your budget or lifestyle. It is possible to strengthen your retirement plan against the unexpected – and Cornerstone Financial Advisory wants to help you do it. Through a proactive review of your financial plan, our team will help you think strategically and implement solutions to make sure you’re ready for anything.
Let’s schedule a time to sit down together, and create a plan to prepare for whatever happens next.
The mission of Cornerstone Financial Advisory is to be an engine of blessing to our clients, families, and community. Our method of accomplishing our mission is by practicing servant leadership.
We will serve and create compelling value for our clients by leading and inspiring clients to reach their goals. With their permission, we will hold clients accountable on keeping their best intentions. We, in turn, translate our client’s needs, goals, and values into a strategy, helping align their actions with their values.
