Planning for Unexpected Costs in Retirement: Key Strategies

Last week, I encountered a neighbor who recently stepped into retirement. We discussed everyday life, and I shared my hectic schedule of shuttling my kids to their games. She mentioned that while her life was generally going well, her home was “starting to fall apart.”

She revealed that she faced nearly $40,000 in repairs this year, prompting me to consider how she would manage these unexpected expenses.

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I am not familiar with her full financial situation. While I suspect she does not need to stretch her funds too tightly, it’s likely she does not have a million-dollar safety net at her disposal.

This conversation sparked my thoughts on unexpected expenses during retirement. I can relate to significant home repairs, car troubles, or medical bills. However, I have not faced these challenges without a steady paycheck, as I am not yet retired.

Fortunately, I have a strategy in place for handling surprise expenses in retirement, and I believe others should consider doing the same.

The Importance of a Solid Budget

Creating and adhering to a budget is crucial for any retiree. At this stage in life, you are spending savings, making tracking expenditures essential.

However, some expenses simply cannot be anticipated. A sudden roof repair or an unexpected hospital stay leading to $3,000 in medical bills cannot be budgeted for in advance.

This underscores the need for a backup plan to deal with surprise costs. I rely on an emergency fund kept in a dedicated account for such instances.

Currently, I manage several accounts for different goals: a college fund for my children’s education, a 401(k) for retirement savings, and a brokerage account for flexible expenditures.

Additionally, I maintain two savings accounts—one is for leisure, like vacations or renovations, and the other is a more stringent emergency fund meant solely for unforeseen expenses.

During retirement, I plan to sustain that emergency fund and only tap it for legitimate emergencies. Importantly, this fund will be separate from the cash I aim to keep for weathering potential market downturns.

Many advisors recommend retirees hold one to two years’ worth of cash for extended market declines. I intend to maintain an emergency fund independent of that cash reserve, ensuring readiness for large, unanticipated expenses.

Mitigating Unexpected Financial Burdens

Some surprise expenses in retirement are unavoidable; however, there are proactive steps you can take to lessen their financial impact.

For instance, enrolling in original Medicare offers an opportunity to purchase Medigap insurance, which can alleviate significant healthcare costs. Similarly, long-term care insurance can help manage the often high costs of home health aides or assisted living facilities.

Regardless, having a well-thought-out plan for unplanned bills is essential. It’s best to start this planning while still employed to ensure appropriate savings.

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The views expressed herein represent the opinions of the author and do not necessarily reflect those of Nasdaq, Inc.