Planning for unexpected costs in your retirement budget

When thinking about retirement, images of traveling to far-off places, learning a new hobby, or spending time with family and friends may come to mind. Whatever your visions are for the future, planning for these goals is essential to helping provide the financial freedom needed to make these dreams a reality. But what about the unexpected retirement expenses that can pop up? These surprise costs should also be on a person’s radar when managing money in retirement and creating a budget for future spending.

How to plan for your retirement income

Planning for retirement income involves creating a sustainable strategy to help replace a portion of your pre-retirement earnings, depending on your lifestyle, expenses, and goals. This process starts by estimating future expenses based on current spending patterns, while also accounting for changes in areas such as housing, healthcare, travel, and leisure. Because retirement income needs can vary, it’s important to include both expected and unexpected costs when building your plan.

A comprehensive approach often includes balancing investment portfolios for growth and income, maximizing tax-advantaged accounts such as 401(k)s and IRAs, and considering options like annuities for guaranteed income. Social Security timing can also play a role, with some individuals choosing to delay benefits to help increase monthly payments. Taking these steps together can help create a more stable and tax-efficient retirement income strategy.

Saving for retirement

With life expectancy increasing, people can live long, fulfilling lives in retirement, spending more time doing the things they love. However, more years means more savings are needed to cover planned and unexpected retirement costs. A key step in retirement income planning is building a clear understanding of these expenses, so you can create a realistic retirement budget that supports your lifestyle. With this framework, it’s easier to track retirement spending and identify opportunities to reduce non-essential expenses and lower your cost of living.

Consider scheduling a meeting with a financial professional for an opportunity to discuss your desired lifestyle, retirement spending, and sources of retirement income. Together, you can review which options would work best and develop a balanced retirement savings strategy that helps close any gaps between income and expenses. This process can also help prioritize key financial goals, so your plan stays aligned as your needs evolve over time.

Spending in retirement

Spending in retirement remains an essential part of maintaining your lifestyle, but the way you allocate money in your budget can change compared to your working years. While regular expenses like housing, utilities, and health insurance typically continue, other financial priorities such as paying off a mortgage or helping with children’s college costs may shift or decrease. At the same time, increased healthcare costs or potential long-term care needs may become more important as you age, which can change how you prioritize your budget. As a result, retirement spending can become less about fixed obligations and more about adjusting priorities and balancing essential needs with goals like travel, hobbies, or family support.

How much can I spend in retirement?

How much you can spend in retirement depends on your savings, income sources, and overall lifestyle, but a common guideline is to plan for about 70% to 80% of your pre-retirement income each year. For example, if you earned $100,000 before retiring, you might expect to spend roughly $70,000 to $80,000 annually to maintain a similar standard of living. Another rule of thumb is the 4% rule, which suggests withdrawing about 4% of your retirement savings in the first year and adjusting that amount over time for inflation. Planning for flexibility and building a margin for unplanned costs into a retirement budget can help reduce the risk of running short and support more sustainable income in the years ahead.

Unexpected retirement expenses

Financial emergencies or unplanned retirement expenses such as home or car repairs, medical bills, or other events that require funds outside of a typical day-to-day budget can be stressful. Without proper planning, these surprise retirement costs can potentially disrupt a retiree’s long-term financial plan and place added pressure on their savings. Here are some common unexpected retirement costs to remember when creating a retirement income plan:

House remodel and renovation

Many retirees are choosing to stay in their current homes, especially if they’ve worked hard to pay off the mortgage or enjoy their neighborhood and community. As you get older, it may be necessary to make your house more aging-friendly, like modifying your stairs, hallways, flooring, kitchen, and bathrooms to be more accessible. These types of renovations will likely require licensed contractors, with the cost varying depending on the project size.

Unplanned healthcare costs in retirement

Among retirement expenses, health care costs are often the most unexpected hit to a retiree’s savings. For a woman who retires at age 65 and lives to 90, projected lifetime healthcare costs are estimated at $560,325, and $442,563 for a man who retires at age 65 and lives to age 88. A retirement income plan that accounts for these type of expenses can provide added financial flexibility when it’s needed most. For example, certain life insurance policies may offer accelerated death benefits that can provide access to a portion of a policy’s death benefit during your lifetime should you be diagnosed with a qualifying illness.¹ Fixed index annuities are another option and can help provide growth potential and a guaranteed stream of income payments throughout retirement.

Medicare

Unfortunately, many retirees believe Medicare will cover a large portion of their health care needs, when in actuality, it likely won’t cover all their costs. Items like hearing aids, dentures, and dental care are not covered by Medicare. There may be an option to buy a supplemental Medicare health insurance plan called Medigap, but this supplemental policy will cost a monthly premium.

Long-term care

When picturing retirement, most people don’t want to think about long-term care, but it is a reality to keep in mind. Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years. Medicare and most health insurance plans do not cover long-term care, even if it’s provided at home, an assisted living facility, or a nursing home.

Loss of a partner

The loss of a partner can be both emotionally and financially challenging. During that time, you might take stock of your current financial situation, including income, expenses, assets, and debts. To assess how losing a partner’s income may impact your overall financial picture, it’s a good idea to review what survivor benefits you may be entitled to receive, including life insurance policies, retirement accounts and annuities, Social Security or pension, and other financial accounts. By being proactive and seeking support when needed, it can be easier to navigate this challenging transition and keep on track financially.

Contact North American for support with retirement income planning and managing money in retirement

Once a framework is created that outlines both planned and unexpected retirement expenses, it should be reviewed regularly to help ensure it continues to align with your goals and financial situation. As part of this ongoing process, it can be helpful to explore solutions that support long-term financial flexibility and retirement income stability. North American offers life insurance and annuity solutions that can help you meet long-term savings goals, provide a financial protection for loved ones, and help cover income needs in retirement. For personalized guidance, contact a North American agent and discover a path toward a more confident financial future.

¹ Accelerated Death Benefits are subject to eligibility requirements.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from the accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.

B1-NA-5-26