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Most of us have some vision of what we would like our golden years to look like. We all have different ambitions: strolling on the beach, traveling the world, reading in a rocking chair beside a lake, hitting the golf course every day, spending time with family and friends, or thousands of other permutations.
When we talk with each other about retirement, those are the things we emphasize. We don’t dwell much on the things that might disrupt our perceptions of an ideal retirement. There isn’t a lot of talk about how much our vision will cost or what unexpected expenses might crop up along the way.
Unfortunately, the gap between planned and actual spending is all too real for many retirees. A recent survey by the Employee Benefits Research Institute (EBRI) reveals that 30 percent of retired Americans say that their expenses in retirement are higher than they anticipated. Indeed, workers often regret not saving enough and not paying down debts before they retire.
Understanding the key expenses that might trip you up will help you avoid these potential stumbling blocks.
1. Housing
A Government Accountability Office (GAO) report found that housing costs represent the greatest share of spending for all age groups. Seniors may be carrying mortgages into retirement, but fail to plan for rising maintenance costs as their homes age along with them. Still others incur additional housing costs through relocations, renovations to accommodate the frailties of age, or even seasonal homes.
For most of us, housing represents our most-significant expense during our working years. For many of us, that will remain the case even into retirement.
2. Health care
While many of us may think in general terms about the cost of health care, we often overlook just how much we will have to spend on this in retirement. The same GAO report found that “older retiree households spent a large share on health care — 15 percent of total spending — which was more than double the share that mid-career households spent.” Retirees can be hit particularly hard by healthcare costs, especially if they have or develop chronic conditions.
Even with Medicare coverage, seniors still incur substantial out-of-pocket costs. EBRI projects that a couple who are Medicare beneficiaries and want to be confidently prepared for the higher end of prescription drug costs would need to have $368,000 in savings to cover premiums, deductibles, and other out-of-pocket expenses. A couple wishing for a brighter outlook on their own healthcare needs and willing to gamble on just a 50-50 chance of having enough saved would target half that amount, but that’s still a lot of money.
3. Debt
In less than a decade, from 2007 to 2016, the percentage of households age 75 and older with debt mushroomed from 31.2 percent to 49.8 percent, according to EBRI. More alarming, the number of those households with debt payments greater than 40 percent of monthly income grew by 23 percent in that same period.
The type of debt owed by retirees may surprise you. Americans over age 60 owed an estimated $66.7 billion in student loan debt in 2015 and represent the fastest-growing segment of the student loan market as more workers go back to school later in life and many parents co-sign student loans.
4. The Unexpected
Americans increasingly take care of family members as well, further affecting the expenses of retirees. Whether it is caring for a spouse or even their own parents, retirees are among the 40 million people nationally who provide adult family caregiving services without payment, according to the AARP. And these caregivers don’t only contribute time. The AARP reports that they spend an average of $6,954 a year on actual costs out of their own pockets in addition to the hours they commit.
Women, in particular, can be affected disproportionately by unexpected expenses, since they are more likely to face costly health challenges, become caregivers, or outlive their spouses, any and all of which can lead to greater financial stress.
5. The Economy
Although you might not think about the economy as a literal expense, it certainly can end up costing you significantly in retirement. How the stock market performs, what happens with interest rates, and the rate of inflation all can have dramatic impacts on your retirement savings and expenses.
While no crystal ball will tell you what the economy will do in your retirement years, you only have to look to history to understand that you are likely to go through some ups and downs. Making sure your retirement spending plans factor in these changes will help make you more resilient in any downturn.
The Solution? Income Planning for a Lifetime
Positioning your retirement savings to cover the contingencies described here (as well as all of the other costs in retirement) isn’t necessarily easy or cheap. It requires thinking about worst-case scenarios and anticipating what their financial impact might be many years down the road.
The process starts with determining how much is enough, based on all of the individual expense estimates and appropriate amounts set aside for contingencies. That helps to ensure that you build an adequate nest egg by the end of your working years.
Too many people believe that’s where it ends: Get to retirement with enough money set aside and then it is supposed to be easy to manage how much and how fast you draw it down for the next 30 years. The reality is that it isn’t easy; it takes careful planning to make those savings last a lifetime. Typically, today’s retirees either spend far less and have a lower standard of living then they need to or spend too much too fast and run out of money within the first five years of retirement. Achieving a better balance will significantly improve the quality of life in retirement.
The Georgetown Center for Retirement Initiatives (CRI) has studied a variety of lifetime income solutions and identified the key benefits and drawbacks of the available options for generating and protecting income to last a lifetime. Ultimately, each retiree needs to factor in their best estimates and risk tolerance to make a decision that will best meet their needs and desires when it is time to stop working.
Focusing on the what-ifs and worst-case scenarios may not be fun today, but it will lead to a more-comfortable and enjoyable retirement in the future. We all want to savor the vision we have for retirement without having to worry about why we didn’t save more or plan better.