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How the Unexpected Can Drain Retirement Income

There’s an all too common belief about retirement planning and it goes like this: “As long as I save as much as I can in my retirement accounts, stick to a reasonable withdrawal rate, and control my spending in retirement, I’ll be okay.” Certainly, that’s a good beginning. But as always, “life” sometimes has a way of interfering with even the most well-thought out plans.

Unexpected expenses in retirement can quickly change a retiree's sense of financial security. A 2015 survey by the Society of Actuaries (SOA) showed that 72% of retirees said they experienced at least one financial shock in retirement, with one-third of those retirees indicating that those unexpected expenses depleted their savings by 25%. More than 20% of the retirees surveyed said their savings dropped fully 50%, according to the survey. (For more, see: Will Your Retirement Income Be Enough?)

Home Repairs, Dental Expenses and Long-Term Care Costs

Like many, you might assume large medical expenses were the top unplanned expense, but that’s not the case. Instead, two of the top unexpected expenses cited by retirees were home repair costs and dental expenses. Other oft-cited unexpected expenses were long-term health-care costs, divorce in retirement and financial assistance for adult children.

The fact that dental expenses and long-term care costs rank high on the list of unexpected retiree expenses shouldn’t be so surprising, but it often is. While Medicare and a Medicare supplement policy may cover a good portion of standard medical expenses, dental services and nursing home stays typically aren’t covered. With median national long-term care costs ranging from $3,628 to $7,698 a month, this unexpected expense can wreak havoc on most anyone’s retirement income plans.

Death of a Spouse

Another huge financial and emotional shock, of course, is the unexpected death of a spouse - an event that can have a devastating impact on the best-laid plans. In addition to the emotional toll, the financial effects include the loss of some Social Security income and the fact that the surviving spouse may have no one to care for him or her.

A Late Divorce

Divorce in retirement may be more financially devastating even than widowhood. Divorced retirees often must learn to live on half of their combined assets and one spouse is typically forced to move out of the home, making it more difficult for both retirees to maintain a comfortable standard of living. Widowers at least have the benefit of survivor pensions, if available, and the remaining assets of both spouses to help maintain their standard of living.

The Impact of Inflation

Another often overlooked “unexpected expense” is the impact inflation can have on retirees’ purchasing power over time. Inflation can steadily erode the value of your retirement income. Many retirees fail to realize that they need to give themselves periodic raises to stay ahead and do so in a way that doesn’t jeopardize how long their retirement funds will last. (For related reading, see: Managing Income During Retirement.)

A great way to better understand the impact of inflation is to think what a gallon of gasoline, milk or even an automobile cost 15 to 20 years ago compared to today. The cost of living will keep rising, even after you are retired. Your income needs to keep up.

Five Strategies to Prepare for Unexpected Expenses in Retirement

Thinking about the various ways your retirement plans might go awry isn’t exactly fun. The good news is there are strategies to help plan for or avoid some, but not all, unexpected expenses or financial shocks in retirement. Here are five of them: 

  • Maintain an emergency fund covering six to nine months of typical living expenses. These funds should be set aside in a safe liquid account such as a money market or short-term certificate of deposit, and be in place before you max out on any retirement savings accounts and well before retiring.
  • Create a plan B that considers the potential loss of a spouse, unforeseen home repairs and medical or dental expenses. This plan might include alternative living arrangements; returning to work, if possible, changing how your retirement funds are invested or income is generated.
  • Prepare a flexible budget to be sure it can handle a variety of scenarios as outlined in your plan B above. Be careful not to overspend in the early years of retirement. A purposeful and fulfilling retirement doesn’t necessarily require a lot of money.
  • Appropriately structure your retirement investments to provide an adequate and increasing income that can help you keep pace with inflation to meet your lifestyle goals both at retirement and into the future. In reviewing your investment strategy, keep in mind a balance needs to be made between playing it safe - and potentially not earning enough to make your retirement funds last - versus being too aggressive and potentially losing significant portion of your retirement savings during a steep market correction. This in of itself is another form of a financial shock in retirement.
  • Exercise, stay active and eat healthily. These may sound obvious, but they can help you stay healthy and alleviate the burden of some unexpected medical expenses.

No one can prepare for absolutely every unexpected expense. As a result, it’s important to plan as much as possible for those things over which you do have some control, and for the things you don’t, to make sure you have at least considered what your options would be if they were to occur. (For more from this author, see: Planning for Retirement Doesn’t End When You Retire.)


Sources: Society of Actuaries 2015 Risks and Process of Retirement Survey. Genworth 2016 Cost of Care Survey Findings.

Securities and Investment Advisory Services are offered through Signator Investors, Inc., Member FINRA/SIPC, a Registered Investment Advisor. AspenCross Wealth Management is independent of Signator Investors, Inc.  1400 Computer Drive, Westborough, MA  01581.