When you draw up a retirement spending plan, you'll find no
shortage of budget worksheets. But they're unlikely to include a
line item for the adult child who lost a job and needs a huge cash
infusion. And have you planned to shell out $10,000 for major
dental work in the same year that your dog needs a $5,000 total hip
These surprise retirement costs can include out-of-left-field
expenses, such as an aging parent who needs financial help and a
dip in the housing market in the year you hoped to downsize. And
then there are those one-time expense shocks that you should
anticipate but pop up suddenly, such as the cost to replace a leaky
roof. A monthly line item for house maintenance won't account for
such a sudden spike in expenses.
These blind-side costs can easily derail what you thought had
been a well-planned retirement. But you can head off financial
setbacks if you "expect the unexpected," says Stuart Ritter, senior
financial planner at T. Rowe Price. "The reality is that there's
always something that happens. If you've got it worked into your
budget, you will have the resources."
There are several ways to go about planning for what retirement
expert Henry Hebeler calls the OSIFs, for "Oh, shoot, I forgot"
items, such as the new car. And then, he says, there are the "unk
unks"--for unknown unknowns, such as a house fire or flood.
The best course is to set up a cash reserve to pay for the large
surprise expenses. Hebeler suggests setting aside 10% of your
savings. And Ritter says there should be an annual budget line item
"dedicated to one of these funky things happening."
You don't have to set aside the total amount at once. Every year
before retirement--or even during retirement--you can reserve some
money. "You make sure your needs are fully funded but that your
wants are funded 90%," says James Nichols, head of retirement
income and advice strategy for Voya Financial (formerly ING U.S.).
The other 10% can be set aside.
Nichols says planning for the "bump in the road" helps you
figure out what you may be prepared to give up. Perhaps you're
willing to forgo a European vacation every five years in case a
family member needs help. "If you don't go through the exercise
early, it becomes a more difficult decision when it comes time to
cut a check for your daughter," he says.
Saving for Capital Expenses
Hebeler suggests a "replacement reserve" for capital expenses,
such as house painting and a new car, furnace and refrigerator.
"You do not include the reserves in calculating your regular
retirement expenses," says Hebeler, author of
Getting Started in a Financially Secure Retirement
Say your roof would cost $10,000 to replace today. You estimate
that the roof has a life of 20 years, and it is five years old.
Ideally, you have set aside $2,500 and will need to plan for $500 a
year for 15 years. Hebeler assumes that inflation will equal
investment returns. For help with your calculations, use Hebeler's
free "replacement budgeting" program at
Health care is among the top unexpected expenses that retirees
cited in a survey by Voya, Nichols says. Retirees "do not
appreciate the cost of health care," he says. "Perhaps they're not
clear on what Medicare covers." Traditional Medicare does not cover
dental, vision or long-term care. Be sure to buy a Medigap
supplemental insurance policy to cover many of the costs that
Medicare does not cover. You can get an idea of what your dental
costs could be by asking your dentist for the typical expenses of
As for your parents, try to assess their financial situation
before you retire. Perhaps you can hire a financial planner to help
aging parents "get some sense of how much savings they need for
their waning years," Hebeler says.