9 Things You Don’t Realize Could Sabotage Your Retirement Budget
Got your retirement budget all sorted? A financial adviser lists the traps that can destroy your savings—and how to avoid getting caught unawares.
You’re saving, right?
If not, here’s a timeline that can help you get started. Many people build up savings, invest in the stock market, and put money into a 401K, so that when they hit retirement they’re confident their all will go smoothly. But even the best-laid plans will run into trouble.
Scott Hanson is the co-founder and senior partner at Hanson McLain Advisers and host of the long-running radio show Money Matters. He lists some those life events which can come at us sideways and undermine our carefully laid retirement plans.
Not considering the long-term
Many people don’t realize that their retirement may last for 30 years or more—look at these 50 reasons you’re likely to age better than your parents. “Take a 65-year-old couple today,” says Hanson, “And there’s a greater than 50 percent chance that one of them will be alive in their 90s.”
According to Hanson, it’s common for people to view their retirement as the “last chapter.” They buy a new car or refit the kitchen, and believe that this will be the last time they need to do it. But it’s unlikely that a car or a kitchen remodel will last 25-30 years. “We all need to plan that we’re going to be around until 95 or a hundred,” advises Hanson.
Raiding your savings too early
As your retirement savings and investments grow, especially if they’ve outperformed your expectations, it’s tempting to dip into them to treat yourself. But this can have far-reaching consequences. “Sometimes people forget that there’s a direct correlation between the amount of money they have in their savings and investments, and the income it provides,” Hanson warns.
The stock market and interest rates can go down as well as up, and we need to squirrel our money away for the bad times rather than splurge when we have a little extra. Hanson’s advice is clear: “The excess returns that we receive in the good times really need to be there to make up for the losses and the poor returns we have in the down times.” See what past mistakes these retired people regret.
Underestimating medical expenses
Everyone realizes that medical expenses are likely to increase as we age, but people don’t always appreciate how much they’re likely to need. “Fidelity states that a couple at 65 will need at least 250,000 dollars set aside for additional medical expenses during retirement,” says Hanson. The amount you’ll have to pay for healthcare varies—check out our state-by-state guide to healthcare costs to see how much you’re likely to pay in your area.
And not all medical expenses are automatically covered by health insurance. Hanson warns that dental care is a commonly overlooked expense, with people sometimes spending thousands of dollars on unexpected dental treatment. Always check exactly what your medical insurance includes in retirement and ensure you have enough to cover your medical needs, not only now but as you get older.
Helping the boomerang generation
We may think our kids have flown the nest and settled into their own homes, but occasionally life throws us a curve-ball. “Sometimes kids go through their own marital crisis,” says Hanson. “And the next thing you know, your child’s moved back in with two or three of their own kids. It can put a real strain on your finances if you’re not careful.”
Supporting your kids financially, such as investing in a start-up business, can also deplete your retirement fund. Of course, we all want to help our family, and some people may feel that’s a risk they’re willing to take. “They might have to cut some of their own lifestyle expenditures if their child’s business fails,” says Hanson, “They need to go into that with their eyes wide open.”
Starting a hobby business
With all the extra time, you might want to use retirement to start a small business on the side with the aim of making a little extra cash by doing something you enjoy. But there are pitfalls, says Hanson: “Quite often, those businesses don’t cover their costs,” he cautions. “They need to sit down and really calculate the cost and whether they can afford that.”
Divorce and remarriage
The empty nest can present a daunting challenge to couples—and not all survive it: Elderly divorce rates have doubled over the last 25 years, and even the best financial planning is unlikely to provide enough funds to support two households. “We see a lot of people quitting on their marriage at retirement,” says Hanson, “and it’s the worst thing from a financial standpoint.” He also points out that statistically speaking, women are worse off after a divorce than men.
Similarly, remarriage can also throw financial plans into a tailspin. Women tend to live longer than men, so men are more likely to remarry than women, but remarriage will mean a complete rethink on your retirement budget.
Take a look at the 15 things a divorce lawyer wants couples to know before making a hasty decision.
Caring for elderly parents
Around 34.2 million Americans cared for an older relative in 2015. “Oftentimes people are forced into an early retirement,” explains Hanson. “They might not be able to continue working as long as they want, because they’ve got a mom or a dad that requires extra care.” Although it’s not always possible to predict when parents may need that extra care—it could be caused by a sudden accident or illness—doing your best to plan ahead will help mitigate some of the financial impact. Here are some important signs that your parent may not be coping well living alone.
Traveling to visit family
The kids grow up, move away, and then have kids of their own. If you don’t budget for travel costs, this can blow a huge hole in your savings. Of course, people may choose to prioritize their travel expenses and cut back on other spending. Hanson describes how for one client, this was her number one priority. “She had two children and both were airline flights away, so that was part of her expenditures,” he explains. “It was very important that she visited her grand-kids on a monthly basis.”
You can save by using these tips from travel agents to reduce the cost of your travel.
Outliving your assets
Should one of these events sabotage your retirement budget, you may find you don’t have enough assets to cover your expenditure. However, that doesn’t mean your retirement plans are shot. Hanson believes there are always options open to people who outlive their assets. “People who don’t have much in assets just tend to reduce their lifestyle as they get older, he says. Sometimes we’ll see people downsize their house or use a reverse mortgage.”
And Hanson also points out that although many people are active well into their 90s, some people may slow down as they age and not need to spend so much on activities like golf, tennis, or travel.