Wednesday, September 26, 2012

What Can Go Wrong?

     We enter retirement with a financial plan that we've figured out will work for us. We have income from Social Security and our IRAs -- and a pension if we're lucky. We might have other investments, or plan to use some of the equity we have built up in our homes. Some of us will receive an inheritance; some of us will supplement our retirement income with part-time work.

     If we're smart we've devoted a good deal of attention to forecasting how much we'll spend in retirement as well, counting up our basic living expenses, then adding in travel and entertainment, car repairs and home maintenance.

     Whatever it is, if we've planned things out, we should be okay from a financial standpoint. Right?

     Not so fast. The question I'm worried about today is: What can go wrong?  What can upset your retirement financial plan?

     On the income side of the equation, we've already experienced one pretty drastic shortfall. Interest rates have collapsed. The savings you keep in a bank CD, or a garden-variety bond fund, used to pay out 4 or 5 or 6% in income. Now, thanks to Ben Bernanke, you're lucky to get 1 or 2%. I recall, when I first left work in the early 2000s, I moved my 401k plan over to an IRA at Vanguard. I was being credited with $700 to $800 a month in interest payments. Now I'm getting a measly $20 a month.

     You can also suffer from the vagueries of stock market, the real estate market, and the job market. It's fine to plan for part-time work. But what if you can't find a suitable job? And it's tough to cash out some of the equity in your home when the value of your house has gone down by $50k or $100k. I, myself, own a rental property -- something like 10% of retirees rely on rental property for a part of their retirement income. But that can pose its own problems (which I will tell you about in a future post).

     We worry about Social Security and our pensions, but in fact, those are probably our most reliable sources of income over time.

     Meanwhile there's the other side of the equation. Expenses. What are the unexpected expenses you might face in retirement? Last year I went to the dentist with what I thought was a routine cavity. I found out I needed to have the tooth pulled. I could have just left a gap in my teeth -- a lot of people do that -- but my dentist recommended an implant. I decided to go ahead. I have some dental insurance, but it didn't cover the implant. Goodbye to $5,000.

     So a big dental bill is one unexpected expense. You cannot put off spending money when you have a toothache.

     I've been lucky on the medical front. Yes, I've had a few problems. But so far they've been covered by my medical insurance. Last year I had to have two operations on my hand -- one because I cut my finger, the other for carpal tunnel syndrome. Neither one was a major operation, and my insurance company covered all but $200. But this year my deductible has gone up to $1,000, per incident. Would have cost me $2,000. So this year I'm trying to be real careful.

     In my state, the governor passed a law limiting real-estate tax increases to 2% a year. But, somehow, when we got our tax bill last month, the increase was 4%. Taxes are a major expense for us; but they are not unexpected. The difference between 2% and 4% is nowhere near the cost of a tooth implant.

     My insurance company tried to raise my car-insurance premium. But I took that auto-safety course, so this year my premiums will actually cost me a bit less than last year.

     But I'd like to know, from people more financially savvy than I am, or more experienced:  What are the financial pitfalls awaiting us in retirement? I don't have any grandchildren yet. Is that going to cost me? I'm just trying to get a handle on things.


Olga said...

I try not to worry my pretty little head about things like that.

Stephen Hayes said...

I have less financial acumen than you so I'm not a good candidate for giving advice. But I'll be paying close attention to the comments you receive.

Linda Myers said...

We had an unexpected $5,500 legal bill. Remember to obey the laws!

MerCyn said...

One expense we did not consider is travel to see family. Whether flying (finding cheap flights is time consuming and sometimes impossible, depending on timing) or driving (7-8 hour trips), travel adds up - even though we stay with the kids when we get to our destination. Another expense friends have faced is outfitting a home for a disabled spouse (e.g. - ramps for a wheelchair to get in and out of the house).

Stas Buttler said...

Don't worry about it. Great blog. I'm following. click click

rosaria williams said...

You have planned more than most! What I found was the expenses of living in a remote area. Yes, we love the privacy, the view, the natural beauty. When we need clothes, household goods, tools, even a variety of foods, we must travel a good 60+ miles. Seeing doctors and specialists may take us another 150 miles. All that traveling, and staying overnight if the appointments cannot be arranged in the middle of the day, all that adds up to many extra dollars. Plus, maintaining a house in an environment that receives storms and major water damage can also add many dollars to our household expense account.

Great post!

schmidleysscribblins, said...

What could go wrong. Expect the best and prepare for the worst. We have Long Term Care insurance policies we bought back in the 1980s.

Good thing to have I think. Dianne

Friko said...

What could go wrong? Your private pension insurance could go bust, that's what. A major, utterly reliable (so we thought) company in the UK did just that. In the end, years later, the government stepped in and we now receive a small percentage of what we should have had. Better than a kick in the teeth but nowhere near as satisfying as that nice cheque we should have had every month.

We're not on the breadline but things aren't quite as easy as they might have been. So you see, even those who prepare well for old age can be let down by circumstances that cannot be foreseen.

Tom Sightings said...

Well, I'm afraid to ask about that $5,500 legal bill -- except, for a legal bill that's fairly miniscule, isn't it? So it must not (hopefully not!) have been a life-changing situation.

I think of traveling as optional, but now that you mention it, when your kids are far away, maybe it does come under the heading of "basic necessity."

And long-term-care insurance. B has it; I don't. That's a topic for another discussion.

Anyway, it seems like we all hope for the best, prepare for the worst, and end up not on the breadlines but with things "not quite as easy as they might have been."

Anonymous said...

Good luck. You describe an abyss that I am just beginning to look into, with great trepidation. I think the solution may be to become a wandering hippy and start walking from Scotland towards a welcoming monastery in Khatmandu eating whatever wild fruits and vegetables I can find along the way. I could just about scrape together the fare for the ferry trip to mainland Europe, then it's dry road all the way. Yipeee! At last I have a retirement plan. Thanks. It may not be successful but it will be interesting :)

Anonymous said...

Teeth were a big unpleasant surprise for me too (several implants on the horizon; cost will exceed what my college tuition was). Saving for dental work was not on *anyone's* list of retirement planning tips 25 years ago. (I developed an autoimmune disease that decreases saliva and increases decay.) Second: weather, and resulting tree work. It never occured to me that I would be working longer to pay tree men. And homeowners should be taking a long hard look at keeping big-ticket items (furnace, driveway,etc.) in good shape.