The Biggest Retirement Costs, Shocks, and Risks

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#77 – Retirement today is very different from what previous generations experienced.

Lower interest rates, fewer employer pensions, new financial products… a lot of variables have changed over the years.

This poses the question: Are things getting worse for retirees? (If yes, how do you cope with increasing risks?)

In this episode, Jeremy Keil shares key takeaways from the popular article “Will the Financial Fragility of Retirees Increase?” by Dr. Steven A. Sass. He provides his own expert insights on the biggest retirement costs, shocks, and risks, and explains how today’s retirees can navigate through the increasingly complex retirement landscape.

Jeremy discusses:

  • Why taxes should be a key component of your spending budget
  • How to prepare for an increase in healthcare costs and the shock of widowhood
  • How married couples can optimize their combined Social Security income
  • Four strategies to compensate for a fall in your retirement income
  • And more

The Biggest Retirement Costs, Shocks, and Risks

Retirement Costs

According to the article by Dr. Steven A. Sass, nearly 80% of spending for most retirees falls in five basic areas: Housing, health care, food, clothing, and transportation. Out of these, housing and health care combined can make up more than 50% of your total expenses.

But this article did not factor in one of the biggest expenses for retirees — taxes! Your total lifetime taxes can add up to hundreds of thousands of dollars.

So, if you want to take better control of your retirement, the biggest expenses to keep in check are:

  1. Housing: The statistics from the article indicate that your housing expenses likely remain the same throughout your retirement. It is a big expense that lasts forever.
  1. Health care: On average, health care costs can increase by 25% after age 75. This means that the health care decisions, especially relating to insurance, that you make at 65 have a large impact later in your life. Keep this in mind when you’re making key decisions (such as Medicare Advantage vs. Medigap) during your early retirement years.
  1. Taxes: It’s important to consider taxes while budgeting because they can significantly affect your Social Security income and investment withdrawals over time. To learn more about effective tax planning strategies, check out our previous blog 5 Ways to Improve Your Tax Picture in Retirement.

Retirement Shocks

The two biggest financial shocks highlighted in the article include:

  1. Spike in medical expenses:

As we mentioned above, you can expect your medical costs to increase as you get older due to a decline in health conditions, unexpected health emergencies, or long-term care.

This is why I’m personally biased towards Medigap plans. Although the higher premiums might not seem justified early during your retirement when you’re relatively healthier, they can be a big help later down the road. Plus, switching to Medigap later is difficult with most insurance companies.

Learn more about planning for Medicare in our recent Medicare series.

  1. Drop in income following widowhood:

It is a common misconception that after a spouse dies, the expenses for the surviving spouse are cut in half. In reality, widows require nearly 75% of their previous income (as a couple) to maintain the same standard of living.

Think about it: Your house still costs the same, your required minimum distributions are the same, and your taxes could even be higher as a widow.

Unfortunately, even though you need 75% of your previous income, your Social Security drops to nearly 62% and your pension can drop by 50% (under the standard survivorship option).

If you want to improve the income for the surviving spouse when the time comes, consider delaying one of your Social Security benefits. After the death of one partner, the lower Social Security between the two of you is dropped. So, if you delay your or your spouse’s Social Security and let it grow for some years, this increased amount is what the surviving spouse will end up receiving ultimately.

We explain how widows can navigate the emotionally overwhelming path of widowhood and make better money decisions in this blog: The First Four Financial Steps Widows Should Take After Their Spouse Dies.

Remember, although we call them “shocks,” they should not be completely surprising for you. Realistically speaking, it is ideal to proactively prepare for a decline in health conditions (leading to higher medical costs) and widowhood (as a couple entering retirement, one of you will likely face widowhood at some point in the future).

Retirement Risks

Retirees today are facing greater retirement risks than previous generations.

Interest rates today are much lower compared to several years ago. Plus, a lot of companies are freezing their pension benefits.

The result? A lower retirement income.

However, you can compensate for the fall in your retirement income through the following ways:

  1. Work longer to have more time to accumulate wealth and investments.
  2. Annuitize some of your investments. If you purchase an annuity, you’re essentially securing a guaranteed payout for the rest of your life. In addition to getting an external annuity, you can also boost your Social Security (which is the best annuity you can get). You can do this by using your investments to fund your expenses initially and delaying your Social Security.
  3. Use a reverse mortgage, which is a type of retirement mortgage where people can receive money from a mortgage rather than make payments. We discuss the benefits of reverse mortgages in detail in our blog: 5 Ways a Reverse Mortgage can Improve your Retirement
  4. Downsize. You can perhaps move into a smaller, less expensive house or cut down your other non-essential expenses.

Although all of the above options might seem undesirable, they can be your way out of financial distress caused by a drop in your retirement income. Our blog “Never Run Out of Money in Retirement” discusses great strategies to help you build a consistent retirement income.

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Do you want to learn more about retirement planning? Check out the resources below!

If you have any questions, feel free to contact us and we’ll be more than happy to assist you!

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