It’s been said that what you don’t know can’t hurt you. When it comes to retirement, however, what you don’t know can cost you—and sometimes cost you dearly. Case in point: There are a number of potentially savings-depleting expenses in retirement that many people fail to factor in when estimating their future needs. Here are five you don’t want to overlook.
1. Helping children and grandchildren financially. One of the less publicized effects of today’s uncertain economy is the increasing number of Americans who are providing financial support to their adult children or other family members. "In fact, the Pew Research Center reported that in 2013, 34 percent of adults between the ages of 18 and 31 lived with their parents—often to the detriment of their parents’ retirement savings," says Angela DiCastri, Director of Retirement Markets for Northwestern Mutual. “Unless you specifically plan for that expense, letting adult children live at home free of charge or lending them a hand financially can be costly. As much as you may want to help your kids and grandkids, your own financial independence should be your first priority.”
2. Retrofitting your house. A lot of people assume that retiring with a fully paid-off house means they’ll be relatively free of housing expenses. But keep in mind, your home ages as you do, making it important to include in your budget both expected and unexpected ongoing and one-time costs, such as painting inside and outside your home, replacing the roof and appliances, and repairing air-conditioning and heating systems. "It also means setting aside funds for certain updates and renovations that may become necessary in the future to help make your home livable and safe as you age," says DiCastri. “This includes projects such as the installation of grab bars, expansion of doorways to accommodate a walker or wheelchair, the creation of a downstairs master suite or a room for a live-in helper, and/or a bathroom remodel, all of which may enable you to retire comfortably at home.”
3. Hiring “replacement” services. For many retirees, living comfortably in their own home is key to retaining independence. Yet according to LongTermCare.gov, 75 percent of those over 65 will need some kind of long-term care service eventually. DiCastri cautions, “As people grow older, they often need help with simple household chores and repairs they once handled on their own, both inside and outside the house. Those replacement services, for tasks such as doing the grocery shopping and laundry, cutting the grass, cleaning the gutters, and shoveling snow, also should be considered when putting together your long-term retirement budget.”
4. Purchasing that “last” new car. Deciding how and when to replace a car can be a contentious issue in retirement. Some people want to drive the car they have “into the ground”; others feel they should start this next stage of life with the car they always dreamed of driving. Whatever side you’re on, one thing is certain: The car you have on the day you retire is unlikely to be the last one you buy or lease. After all, you could still be driving 20 or more years from now. What’s more, your needs change as you age—and that includes the sorts of things you need in a car. For these and other reasons, it’s prudent to add money in your retirement budget for at least another set of wheels.
5. Maintaining two houses. Owning two homes offers many retirees the best of two worlds: having a primary home near family and a secondary one in a place that satisfies other needs, such as their desire to avoid harsh winters or to have access to intellectual and cultural stimulation, for example. The cost of owning two properties can be greater than you’d expect, however. “The true cost of home ownership doesn’t end with the mortgage payment, taxes and insurance,” says DiCastri. “You’ll probably spend several thousand dollars a year for dual expenses on everything from regular lawn care and ongoing utility bills to home-owners’ dues and a monthly fee to someone who can oversee your property when you’re not there. Depending on the distance between homes, you may need to also factor in airfare and the cost of leaving an additional car at your second home.”
When people do their budgeting for retirement, many assume that their income needs will be higher at the beginning of retirement, when they are likely to be more active, and then level off or decrease as they age further. "Not necessarily," says David Blanchett, Head of Retirement Research for Morningstar Investment Management. “We have found that there is what we call a ‘retirement smile.’ This retirement spending curve demonstrates that spending doesn’t level off after the first years of retirement. Instead, income needs typically plateau for a time but then increase later in life as housing, long-term care and other health needs become more of a factor.”
Because of this, Blanchett believes that estimating how much savings you’ll need can be a complex calculation. “Generic replacement rates, such as the often cited rule of thumb that you’ll need 70 to 80 percent of your pre-retirement earnings to maintain your lifestyle once you stop working, may offer a good starting point—but they can only take you so far. The true cost of retirement is highly personalized and is based upon your specific spending needs and unique circumstances.”
That’s why Blanchett suggests that you consider all the potential expenses you may encounter during retirement when doing a retirement needs calculation. “The more carefully you identify and quantify those potential costs, the more reliable your planning is likely to be.”
For this reason, many people turn to a financial advisor for help. He or she can work with you to identify potential retirement expenses and help you create a sound retirement income strategy with the potential to meet your needs through the beginning, middle and end of retirement.
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The Northwestern MutualVoice Team is a group of professionals who share insights and opinions from experts and industry leaders across the enterprise. Our vision is to inspire others to take action and plan for their financial future through topics ranging from financial planning, retirement planning and distribution strategies, wealth accumulation and preservation, to leadership, philanthropy and innovation.
