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Jeff Opdyke: Unpleasant surprises in retirement aren't what you think

Jeff D. Opdyke, Rate.com on

Published in Home and Consumer News

Our brains are ill-equipped to handle what they cannot foresee, the result of something known as status quo bias, an assumption that every tomorrow will pretty much look like every today.

Problem is, life constantly changes. Most changes are small and either unnoticed or easily managed. A few, however, are substantial and radically disrupt our lives.

For retirees, these disruptions can create debilitating financial difficulties that can all but ruin retirement.

What we're talking about here are unexpected financial shocks that we don't know to prepare for. Not run-of-the-mill expenses like, say, a higher auto insurance premium or a property tax increase. We're talking about large events that stress a nest egg. They're more common than you might imagine.

Indeed, the Society of Actuaries' Committee on Post-Retirement Needs and Risks has been working for two decades to better grasp how retirees manage financial issues, as well as the real risks they confront, after a working career. The results: Nearly one in five retirees, and nearly one in four retired widows will experience four or more financial shocks.

Unexpected healthcare costs get a lot of attention, but the actuaries found that's typically not the biggest bugaboo. Retirees who have Medicare and a supplemental plan (about 81% of them, according to Kaiser Family Foundation) typically have their medical bills well covered.

 

Instead, the actuaries report that, based on focus groups and interviews with those retired at least 15 years, the most common financial shocks are major home repairs (28% of retirees) and major dental costs (24%). The latter occurs because Medicare and most supplemental plans have weak or no dental coverage.

Other significant shocks include widowhood, divorce during retirement, long-term care expenses and adult children needing financial assistance.

The actuaries' research suggests retirees are resilient, making necessary adjustments to their spending to cover the shocks. But those adjustments are often substantial, leading to a degraded lifestyle.

More than a third of retirees saw their assets decline by 25% or more. Roughly 10% had to reduce monthly spending by 50% or more. All of which underscores one of the more significant shortcomings of retirement planning: preparing for what you do not know to expect.

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