Two-thirds of workers across three generations – millennials, Generation X and baby boomers – are confident they’ll be able to retire with a comfortable lifestyle, according to “What is ‘Retirement’? Three Generations Prepare for Old Age,” a 2019 survey of workers published by Transamerica Center for Retirement Studies, a nonprofit foundation based in Los Angeles, California. [1] But have you thought of all the expenses in retirement?
You may think you’ve got retirement covered with savings in retirement and other accounts. However, whether you’re nearing retirement age or already enjoying retirement, unexpected expenses due to ageing, along with shifting economic and cultural factors, can derail, or at least curtail, your financial plans for retirement.
Here are surprise costs that can strike a disabling blow to retirement savings.
Long-Term Care Insurance
One way to protect yourself from devastating healthcare, medical or nursing home expenses is to purchase a long-term care insurance policy. Generally, long-term care insurance offers coverage for an extended nursing home stay, although some policies may include assisted living costs, in-home skilled nursing or help with daily living activities such as bathing and dressing or adult daycare. Long-term care insurance isn’t cheap, however.
The annual premium in 2019 for a long-term care insurance policy with an initial pool of benefits of $164,000 (reaching $386,000 at age 85) was $1,925 for a 60-year-old man and $3,000 for a woman the same age, according to the American Association for Long-Term Care Insurance, a national organization and resource for consumers and insurance professionals.
Long-term care costs
Even if you’re healthy now, someone turning 65 today has nearly a 70% chance of needing long-term care services or supports in their lifetime, according to the U.S. Department of Health and Human Services. [2] Around 20% will need long-term care support for longer than five years.
How long would it take for national annual median costs (according to the 2019 Genworth Cost of Care Survey) for a home health aide ($52,624), assisted living facility ($48,612) or a private room in a nursing home ($102,200) to wipe out your retirement savings, especially if your spouse also needs long-term care? [3]
In most cases, Medicare won’t cover those costs for more than a few months. Medicaid may pay for long-term care but usually only if your income or total assets are below state eligibility requirements. [4] If you carry long-term care insurance, retirement savings are more likely to be spared.
Read: 6 Long-Term Care Insurance Facts to Help You Plan for Retirement
Health insurance
For those looking to retire before age 65 and Medicare eligibility, monthly health insurance premiums could be one of your biggest expenses. The average monthly cost for an Affordable Care Act “silver” policy for someone 60 to 64 years old is between $1,016 and $1,123 per month, according to ValuePenguin. [5]
Approximately 14% of those surveyed in the University of Michigan’s 2019 National Poll on Health Aging survey said they kept a job specifically to have health insurance through an employer. Around 11% delayed or considered delaying retirement to have health insurance through their job.
Unless you have an employer retirement package that includes health insurance, plan on paying high health insurance premiums until you’re eligible for Medicare. You may find that toughing it out for a few more years at your job is worth the savings.
Healthcare Expenses
Even with Medicare covering many medical expenses and healthcare costs, a retired couple aged 65 or older would need around $325,000 in savings to cover health insurance premiums and median prescription drug expenses in retirement, according to a 2020 study conducted by the EBRI.
Health care expenses can add up fast when you include Medicare supplemental insurance premiums and out-of-pocket costs for prescription and over-the-counter drugs, hospital care, lab tests, optical and dental care and medical supplies.
Caregiving for an aging family member
An aging parent or spouse who needs care or more attention can increase your expenses, possibly for several years. Expenses can include travel costs, helping with caregiver wages, paying for home modifications to accommodate mobility issues and time away from work if you’re not yet retired.
More than half of family caregivers must take time off from their job, reduce work hours or quit their jobs to accommodate caregiving responsibilities, according to the AARP report Family Caregiving and Out-of-Pocket. [7] Of those surveyed, around 3 in 10 dipped into personal savings, 1 in 6 reduced the amount set aside for retirement, and more than 1 in 10 withdrew from retirement savings, according to the report.
Read: Caring for an Older Parent? Know These 8 Family and Medical Leave Act Facts
National economic crisis
When the stock market crashed in 2008, U.S. retirement accounts lost around $2.7 trillion, 31% of their peak value, in the first quarter of 2009, according to the Urban Institute. [8] The combined peak loss from plummeting stock and home values cost the average U.S. household nearly $100,000, according to The Pew Charitable Trusts. [9] The decline in stock values alone cost around $66,000 on average per U.S. household, according to that organization’s findings.
No one was expecting a pandemic or the economic downturn after. Inflation and a chaotic housing market had many retirees returning to the workforce to cover their expenses in retirement.
Adult children who move back in
Years after adult children leave their parents’ home to pursue a career, find love or just get away from Mom and Dad, some return, decades later, jobless, divorced and/or deeply in debt.
A life events survey by Fidelity Investments found that 1 in 9 baby boomer parents surveyed said their “boomerang” kids moved back home in the past year. [10] Around 76% of those parents said they faced higher expenses because of the familial tenant.
Read: 6 Ways Supporting Adult Children Can Wreck Retirement Plans
Millennials who won’t move out
Many millennials live with their parents well beyond high school and college, delaying moving out for years, if they ever move at all. Roughly 1 in 3 adults aged 21 to 37 don’t gain financial independence from their parents until they’re 25 or older, according to a survey by Country Financial Security Index. [11]
More than one-third of millennials still live with their parents, the survey found. According to the survey, other expenses parents may foot for grown millennial children include cell phone (41%), groceries and gas (32%), rent (40%) and health insurance (32%).
Transportation
Once you retire, you’ll no longer have to drive to work, which means your transportation costs will probably decrease. However, transportation costs – car payments, vehicle insurance, gas, maintenance and repairs – could still be a large annual expense in retirement, especially if you’re making car payments. If you become unable to drive, you may have to pay public transportation or rideshare costs.
The EBRI study found that for people ages 50-64, transportation accounted for around13% of annual spending. Transportation costs were about 12% of annual spending for those between the ages of 65-74 nearly 10% for ages 75 and older.
Housing
Housing is the largest spending category for every age group, and retirees are no exception, according to a 2019 report from the Employee Benefit Research Institute (EBRI). The report found that people ages 50-64 had a median cost of $25,000 annually for housing expenses in 2017.
People ages 65-74 had a median cost of $21,000 to keep and maintain a roof over their heads, and the median housing expenses cost for people 75 and older was around $18,000 on housing expenses annually, according to the EBRI report.
Read: 6 Ways Downsizing Can Stretch Retirement Income
