5 Shocking Blind Spots That Can Derail Your Retirement Plans

Co-produced with PendragonY

Introduction

We get a lot of terrible advice over the years.

Ever been told to wear metal in a lightning storm?

Ever been told that leaving a window open at night will make you sick in the morning?

How about this doozy, that your retirement spending will be only 70% of your pre-retirement spending?

Many people approaching retirement are advised just that! This advice is based on the ideas that you won’t be driving to work each day, won’t need to spend money on clothes for work, and will eat more lunches at home. Adding insult to injury, some are also told that you won’t be saving for retirement anymore. This is terrible advice! Don’t believe it!

Certainly, retirees will spend less than they did on some activities, but that doesn’t mean they will be spending less overall. Remember, you no longer have someplace to be 8 or more hours a day, 5 days a week. This will leave you free to travel or take up other activities – all of which will cost money.

Even if you properly budget for new activities that you take up in retirement, some costs can derail your retirement plans if you don’t account for them as well. Let’s look at 5 of them, each of these is often overlooked and can derail a retirement if a plan fails to address them.

1. Insurance

Everyone remembers to budget for health insurance, but often other types of insurance are overlooked. Insurance costs for homeowners are soaring across the country due to floods, tornadoes and hurricanes, wildfires, and other natural disasters. Rising replacement costs also impact insurance rates. Car insurance rates are also climbing along with the increase in car prices. Premiums for renters’ insurance are climbing for many of the same reasons. Don’t forget the insurance costs for that vacation home you might have purchased now that you have more time for vacations. Retirement planning needs to address all these needs.

It is a very bad idea to skimp on insurance, particularly when you are living on a fixed income in retirement. It is important to keep unexpected out-of-pocket expenses to a minimum.

2. Death

It is a fact of life that we all die at some point, and retirees are more likely to experience the loss of a loved one than younger folks. Worse, that death can lead to significant changes in income. Sadly, when a spouse dies, the household income will decline (minus any death benefits).

Even though a spouse of more than ten years is entitled to collect on your Social Security, the household will only be collecting one check now, not two. And spouses must make sure to choose the “joint-life option” for pensions “versus the single-life option” or the pension won’t continue for the surviving spouse.

And don’t forget to make a plan for what happens for both members of a couple. My grandfather fully expected to die before my grandmother, but cancer ended up taking her first, and all the insurance he had to cover his death did him no good since he had none on her.

So a good retirement plan for a couple will take into account the changes in income that will come after the passing of one.

3. Long-Term Care

Something on the order of 70% of retirees will eventually need some type of long-term care, according to the U.S. Department of Health and Human Services. And such care can be quite expensive depending on the level required. Care at an assisted-living facility (near the low end of the various levels of care) averages about $4,500 a month, while a private room at a nursing home (the higher end of the level of care) can run as much as $9,000. A popular option for those wanting to stay at home is a home health aide, but don’t expect any big savings there as they average over $5,000 a month!

These costs make long-term care one of the hardest areas for retirees to plan for. If you have few assets, you can go on Medicaid, but it can be hard to find a bed in a good facility. For those who have ample savings or long-term care insurance, the options are better. However, many in the middle class are stuck between these two positions and will struggle to pay for the care they need.

In planning for these costs, retirees should look at several options, which include: traditional long-term care policies, hybrid life insurance/long-term-care policies, and life insurance with a chronic care rider. Life Insurance plans with a chronic care rider seem the most flexible, but it pays to investigate what is available in your area.

Another possible solution is to use deferred income annuities to cover the cost of long-term care. These can be structured to provide a retirement paycheck that can be deferred until the insured goes into a care facility.

4. Medicare is Not Free

To some, it might be a big shock, but Medicare and health care costs. Employer-provided health care is usually highly subsidized (I remember paying only 20% of the cost). When you retire, this subsidy often goes away, and that can make for big increases in medical expenses, even when you qualify for Medicare.

At 65, you’ll pay standard Medicare premiums for Part A (hospitalization). You may also need to pay premiums for Part B, and either a Medigap plan or Medicare Advantage. Over the course of a typical retirement, that could amount to hundreds of thousands of dollars!

For many investors, the cost of medical insurance could exceed their retirement account balances. Failure to plan for these expenses could easily derail a retirement plan.

5. Inflation

Everyone is being hit now that inflation has returned with such a vengeance, and retirees are particularly hit hard. What might have been a good income with low inflation, with higher inflation is looking like it might not be good enough after 10 or so years of retirement.

One way to offset higher inflation is to look for investments that do well and reward their shareholders in inflationary environments. With their profits driven by inflation, such investments should be able to increase their dividends to help offset inflation.

Retirees will need to rethink their budgets and plans to account for higher inflation. It is best to make these calculations assuming that inflation will persist longer than most folks expect at this point. Better to have a bit too much income than to not have enough.

The Income Solution

In order to counter the above headwinds, retirees can mitigate these risks through a smart investment strategy that we call The Income Method. This can help a retiree by producing a stable flow of cash to cover expenses and that will grow to offset inflation. The Income Method strategy focuses on companies and funds that make regular distribution payments, which offer a stable flow of cash. We evaluate each investment to ensure that it is generating enough cash to pay the current distribution. By picking those solid high-dividend investments, we are getting a healthy income and financial security.

Income is very powerful, as it creates a cushion for any unexpected expenses, and permits reinvestment to grow the current dividend stream. With most of the increase in income coming from buying new shares, any increase in the dividends per share from an individual investment just increases the flexibility the investor has.

Conclusion

Retirement can be a fun and exciting time with a little planning, but part of that planning is a realistic assessment of your spending. You must have plans to deal with unexpected costs. We have discussed 5 such expenses that many investors might not be aware of or might see as just small problems. A little planning prevents these costs from derailing your retirement.

Take some time today and plan to succeed. It’s often said that failing to plan is planning to fail. I happen to agree with that wholeheartedly. I like to plan for the unexpected so when it does arrive suddenly, you’ll be prepared.

Investing for income can help you absorb the added costs of potential issues, all while allowing you to live with greater levels of flexibility!