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Retirement

Don't let these unexpected costs derail your retirement: Plan ahead instead

Robert Powell, Special for USA TODAY

It’s not what you know that will crush your lifestyle in retirement. It’s what you don’t know.

And that’s especially the case when it comes to expenses in retirement.

When planning for retirement, take unexpected costs into account, financial advisers say.

On average, retirees can expect housing to represent about one-third of expenses in retirement, health care, 10% to 15%; transportation, 15%; food, 12%; and apparel, insurance and discretionary expenses making up the rest.

Such costs, in many ways, are somewhat easy to plan for, say financial advisers. But there are several costs that many retirees fail to consider when calculating their retirement expenses. Those include:

• Unexpected medical costs. Recurring, predictable out-of-pocket health care expenses remain somewhat stable over the course of retirement, according to the Employee Benefit Research Institute (EBRI), a non-partisan research institute based in Washington, D.C.

It’s the non-recurring unpredictable expenses — such as surgery, hospitalizations and nursing home care — that increase with age, tend to be more expensive and, in the absence of a plan to manage those costs, can wreak havoc on a household's finances, according to the report, "Taming retiree health-care costs."

Powell: Taming retiree health care

Others agree. “The fact that medical care expenses in retirement are enormous and widely discussed somehow still doesn’t prepare one for the shock,” says Dirk Cotton, a financial planner and blogger based in Chapel Hill, N.C.

Dirk Cotton, a financial planner and blogger based in Chapel Hill, N.C.

• The cost of adult children and grandchildren. Retirees with grown children or grandchildren should consider the possibility that they will need help to cover medical expenses, advanced education or even legal expenses, says Cotton. “I convinced one couple with a child still in college to postpone retiring until she graduated,” he says. “You never know if a master’s program or medical school tuition might loom in your future, or just an unexpectedly long period to establish a career.”

• Infrequent expenses. When planning for how much income they’ll need in retirement people tend to forget about infrequent expenses, such as major home repairs, auto replacement and out-of-pocket costs for major dental work, says Dana Anspach, the founder of Sensible Money in Scottsdale, Ariz.

Her advice to handle irregular expenses: Create a “sinking fund” that would earmark money to replace or fix something. So, if you own a home worth $300,000, plan on spending a minimum of 1% of your home's value, or $3,000, per year for repairs and maintenance. “You may not incur this expense every year; in those years you bank the money for the year,” she says. “Then, when your roof needs replacing, or the entire house needs to be carpeted, you’ll be prepared.”

She recommends using the same approach for auto repair and dental work. “Build a monthly amount into your budget and let those funds accumulate in a savings account so you’re not caught off guard when you need to replace your vehicle or — something even more important — your teeth,” says Anspach.

Dana Anspach, the founder of Sensible Money.

• Don’t forget Uncle Sam. Anspach says another major expense that can catch you off guard in retirement is taxes. “Too many people rely on something like the 4% rule, which may lead them to believe they can withdraw $4,000 per year for every $100,000 of savings,” she says. “However, if that savings is in a traditional IRA or 401(k), they’ll have to pay taxes on the withdrawal. So for every $4,000 withdrawn there may be only $3,000 (or even less) to spend.”

Her advice: If you’re not sure how to plan for taxes, ask a CPA or retirement planner to help you figure out how much to set aside. “Depending on the types of retirement income you have, the amount you need to set aside can vary from 10% of your income up to 40%,” she says.

• The true cost of retirement. When it comes to expenses in retirement, the good news is that it’s not all bad. That’s because expenses tend to decline throughout retirement for retirees who spend appropriately for their wealth, according to research by David Blanchett, the head of retirement research at Morningstar Investment Management in Chicago. Read Estimating the True Cost of Retirement.

“It’s important to consider the likely trend of spending throughout retirement and not just the cost of the first few years,” says Cotton.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.

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