Note: This article originally posted on Aug. 5, 2012, but we are re-featuring it as part of Morningstar.com's Retirement Readiness Week.
Many pre-retirees sensibly devote a good deal of attention to forecasting how much they'll spend in retirement, thinking through their basic living expenses as well as how much they'll spend on extras like dining out and travel. They anticipate when they'll need to replace their roofs, when it will be time for a new car, and how their medical expenses are likely to trend up as they age.
But it's simply not possible to forecast each and every expense with precision. In a recent Investing During Retirement Discuss forum thread on Morningstar.com, I asked our retired readers to share which retirement expenses had caught them off guard. Health-care-related expenditures topped many retired readers' lists, with dental work most frequently cited as an unpleasant source of additional costs. Other readers noted that happy aspects of retirement--new grandchildren, travel, and hobbies--had bumped up their in-retirement expenses. To read the complete thread or share your own expense surprise during retirement, click here.
'An Unanticipated Dental Event'
One of the most striking aspects of the discussion was just how many posters mentioned dental expenses as a cost they had underrated prior to retirement. Although many employed people are covered under their companies' plans, retirees can't typically purchase insurance, and significant dental work can be costly.
LFremont summed it up as follows: "The one cost area that is uncontrollable and hard to anticipate is dental. I don't think there is any decent insurance to protect you, and the cost can be really substantial."
And in contrast with other expenses, such as home and car maintenance, dental costs can be lumpy, making budgeting difficult. Orygunduck wrote, "Dental expenses are tough to predict, as a couple of crowns can run up costs, quickly! I liken it to having to have major work done on your car's engine and transmission at least once a year."
Posters Jkimel44 advised that the best defense against rising dental costs is to set aside a fund to defray them as they occur. "Put a little extra money aside each year to cover an unanticipated dental event."
'Health Insurance Is Also a Growing Burden'
Although dental care received a large number of mentions, many readers cited health-care insurance premiums, as well as additional medical expenses not covered by Medicare, as a source of unanticipated costs during retirement.
Health-care insurance is a particularly large and unwelcome expense for retired people who aren't yet eligible to obtain coverage under Medicare. Gizmo25 shared, "Health-care insurance was expected to be expensive, but the actual amount was a shock. I retired at 57, my wife at 53. Over one third of our living expense is for health care, and Medicare is still a couple of years away."
Reddog is facing down a similar situation. "My wife is pre-Medicare, and insurance is a whopping $4,000 a year, even with my company's plan. Yikes, pretty outrageous."
The rapidity with which health-care premiums have risen caught Gyer12 off guard. "Health-care insurance premiums went up 100% after the first year of retirement and 30% last year."
Ditto for HNRROBERT, who shared specifics on rising health-insurance premiums. "Our biggest surprise was heath insurance, we retired when we were 57 and health insurance was $8,500 then; now, four years later, we pay $15,300 for less coverage."
Unfortunately, being eligible for Medicare doesn't eliminate unexpected costs altogether. DrHelen noted, "Even with Medicare, health insurance is also a growing burden with Part B & D premiums as well as Medicare supplementary."
Given that inflation in health-insurance premiums could be here to stay, Jkimel44 believes that it's valuable to build those increases into the budget. "Health insurance is expensive, but fairly predictable. Just make sure to factor in a 20% rise in premiums each year."
In addition to citing insurance costs, readers noted that they hadn't fully anticipated other health-care-related expenditures in retirement.
GilT4609 wrote, "Drug co-pays and 'donut hole' costs [were] a surprise even with a Medicare advantage plan."
Long-term care costs, even with a long-term care insurance policy, can also be eye-popping, according to JonathanQ. "My parents' biggest (mostly) unanticipated expenses relates to care for my stepfather's Parkinson's, dementia, and his inability to fully care for himself after some strokes. A top-of-the-line long-term care policy pays for the $100,000 a year nursing home, but he could outlive its six years of benefits and there are plenty of incidental expenses. His retirement assets (rental property) could be liquidated for a few years' more care; after that she will be supporting him on her pensions and investments."
While acknowledging that medical expenses can be difficult if not impossible to control, Billster advised that retirees can empower themselves by taking preventative measures: "There are certainly no guarantees in retirement life but maintaining a healthy preventative lifestyle goes a long way toward a happy, healthy, and secure retirement. In fact it is every bit as important as making the right investment/asset allocation choices, as your physical health or lack thereof directly affects your financial health. Investing an hour each day exercising could have a huge payoff financially over the course of your retirement lifetime."
'We Are Under Water'
For other posters, their biggest category of unanticipated expenses during retirement has related to their homes.
Rabsint, like many, has seen plans to downsize derailed by an uncooperative housing market; having to bring cash to the closing on the sale of the home will be an unanticipated expense. "We planned to sell the house and downsize but it hasn't sold for two years and we are under water. This year we are determined to get out but the loss will be substantial and not tax-deductible. We will have to take a large distribution from my [retirement plan], which will increase our taxes so we get hit on both ends."
For Veroman61, fluctuating homeowners insurance rates have complicated the budgeting process. "Living in the state of Florida, homeowner's insurance is volatile. We have been lucky the last eight years with no major hurricanes so the state has been underfunding the catastrophic insurance fund. This is money contributed by private insurers. To comply, premium increases are passed on to consumers so I along with countless others have seen our premiums rise to an average of 40% in a single year. That has been the biggest surprise."
Rising property taxes, particularly unwelcome in a cratering housing market, have been an unwelcome budgetary surprise for causal research, who wrote, "The biggest expense that we could have anticipated, but didn't was property tax. From the time we planned our retirement budget to now our property tax has increased over 300%. Not only does the rate go up but the city and county both raise property valuations as if there was no real estate crisis. No one in our neighborhood could sell our property for the tax valuations, but all protests are denied."
Richendric's experience has been similar--higher taxes, sinking property values--but he hopes the worst is over. "The only big surprise so far has been the 30% increase in property taxes on our retirement home in the last two tax years. The magnitude of this increase was caused primarily by reduced state funding to local school districts. After the latest local elections, we now have some local spending cuts and a new tax rate for the 2012 tax year, which is about 1% lower than last year with an across the board 5% reduction in property valuations, without any classroom teacher layoffs. Hopefully, the situation has stabilized."
'A Whole New Cost Center'
Other posters noted that spending money on family--either to lend a helping hand to family members in need, help pay for weddings, or spoil grandkids--ranked among their largest unplanned expenditures in retirement.
For SailerBob, and many families, the economic crisis has made helping out essential. "Surprises: Having to help one of our kid's family when he went through a period of stagnant income growth (none) for about four years when his employer changed ownership. We took out a mortgage on the paid-off house to do that, but made a second mortgage on his house as collateral for a loan, not a gift. They are paying it off, but having a mortgage of our own was a major surprise."
Jkimel44 agrees that family obligations can create unanticipated outlays: "You can also get hit by unexpected expenses from your children and your parents if any of them needs to turn to you for financial assistance. I have, so far, been able to budget ahead for those items."
For other posters, unplanned in-retirement expenses have arisen from happy life events.
For example, retirement often coincides with children's weddings; orygunduck and his spouse will be pitching in to fund an event that will be more lavish than they expected. "[Our daughter] said years ago that she only wanted a simple, private, and low-key ceremony. Yeah, right."
Monitro is also helping to foot the bill for wedding-related costs. "A daughter's upcoming wedding has been a large, unexpected debit to absorb. Although, I can't imagine skimping on your first-born's wedding."
Grandchildren have been a joy, and also a source of unplanned spending, for other readers. Emkute quipped. "Grandchildren are a whole new cost center."
Orygunduck concurred. "We have seven [grandchildren], and had never thought we'd be spending so much on them. Although this is a 'feel good' expense, it's still an unplanned expense."
For DrHelen, caring for furry family members has carried an unexpectedly high price tag. She wrote, "Veterinary bills are almost as much of a surprise as dental. Also providing care for the animals (two cats and a dog) when we travel adds up to roughly the cost of an additional hotel room every day."
Other retired readers noted that having more free time, as is typically the case during retirement, simply affords more opportunities to spend.
Gyer12 wrote, "With the additional time, shopping has become a pastime."
An unanticipated leisure-time expense for Kayaker? "Golf! My wife took up golf when we retired, and now she has twice as many pairs of golf shoes as I do--and 'golf outfits,' too, whatever those are!"
Travel has beckoned for DrHelen. "With more time we take longer trips. It's well worth it, but we hadn't originally budgeted for this much."
How to Deal With Unplanned Expenses
Readers also shared tips for anticipating, and managing, unplanned expenses.
LCBenz acknowledged that some expenses are difficult to forecast and manage, but advises, "To establish a degree of stability, we setup a reserve fund--linked to our joint checking account--into which we deposit any excess funds each month. If it grows, we'll then tap it for vacation funds or another pleasure junket."
Jkimmel44 shared this strategy. "Each year I make up an 'operating budget' and a 'wish list.' As an operating surplus develops during the year, we may or may not buy one or more items from our wish list. I generally 'book' these as capital purchases."
Chief K concurred with this strategy, urging, "Figure out what you can afford as regular, routine, and recurring expenses for your expected standard of living and budget for those expenses. Then see how many wishes, splurges, surprises, shocks, or downright disasters you can enjoy, or survive, while maintaining that 'expected standard of living.'"