You’ve dutifully put cash away for retirement, looking forward to the day when you can travel the world in search of the perfect sunset. Thanks to your solid financial planning, you expect to live out your golden years comfortably, enjoying the spoils of your hard work and sacrifice over the years.
Unfortunately, though, even the most prepared retirees can be blindsided by the realities of life without a steady paycheck — especially when unexpected expenses crop up. In fact, some emergencies can all but bankrupt retirees, draining all of their savings and preventing them from living the lives they prepared for during their working years.
The good news is that by expecting the unexpected and preparing for those possible financially devastating circumstances, you will be able to somewhat mitigate the damage and stay on firm financial footing. As you review your retirement goals and plans, consider whether you could weather one of these unexpected expenses.
One of the reasons that 401(k) and other retirement plans are so popular is that they allow you to defer paying taxes on that money until later. When later comes, though, so does the IRS — and they may be looking for more money tomorrow than they would be today. The law requires that you withdraw money from your retirement accounts by age 70.5, and you’ll pay taxes on every withdrawal if you meet certain income guidelines. Since tax laws change regularly, and income tax rates are virtually guaranteed to increase over the next few decades, you could see your nest egg reduced significantly by taxes.
You can lessen your tax burden somewhat by maintaining both traditional retirement accounts with a Roth IRA or Roth 401(k), which allow you to contribute post-tax income toward your retirement. Funds drawn from those accounts are exempt from income tax later on.
It’s an undeniable fact: as we age, we are more likely to develop serious conditions and illnesses that require medical care. These expenses can be unpredictable, though, and to some retirees’ surprise, Medicare doesn’t cover everything. Supplemental insurance coverage can ease some of the burden, but you should plan on having at least some medical expenses. In addition, you should have a plan for long-term care, should you need it. If you become incapacitated to a point where you can no longer care for yourself, you may need to hire help or move into an assisted living or nursing facility. The cost for nursing care can be upwards of $100,000 or more per year, which will quickly diminish any savings you have. Purchasing a long-term care insurance policy to cover at least part of those expenses is a smart financial move.
Children and Grandchildren
You may have thought that your obligation to support your children ended once they moved out and started their own lives, but think again. Especially in a difficult economy, many adult children find themselves living with mom and dad again or calling for help with a sticky financial issue. Even if your children are able to cover their own expenses, you may be surprised when it comes time to buy gifts for holidays and birthdays, or the costs associated with traveling around the country to visit family for vacations or milestones, which can quickly eat into savings.
You might be spry and active despite your aging body, but your home may be showing signs of age. The expenses associated with owning a home — leaking roof, drafty windows, foundation problems, appliance issues — don’t go away once you retire. Even if your home doesn’t develop any major issues, you may need to hire help for simple maintenance tasks that you once did yourself, presenting a new and possibly significant expense.
You never expected to see the triple digits, but here you are, the subject of a local news feature about 100th birthdays. Thanks to better medical care, people are living longer than ever before, and for a healthy and active retiree, it’s not unreasonable to live 20, 30, even 40 years past retirement. While you can never predict when you’ll pass, you don’t want to outlive your savings. When planning for retirement, consider your predicted life expectancy, and then add another decade just to be on the safe side.
Successfully planning for retirement doesn’t mean you have to find a crystal ball and know exactly what’s coming down the pike. However, you do need to plan for the inevitable emergencies, miscalculations and unexpected expenses. If you do, an extra trip to visit the grandchildren or a hospital stay for the flu won’t derail your life of leisure.
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About the Author: Abby Witherspoon is a financial professional who blogs about retirement planning and insurance issues. She works with companies like LTC Tree to educate individuals about the best way to enjoy a comfortable retirement and maintain solid financial footing.