Many people anticipate their future living expenses as they approach retirement, aiming to pad their nest eggs so they'll be able to live comfortably on a fixed income.
It's the unexpected expenses that can trip them up.
Top among those expenses that can put a wrench in retiree budgets: Unexpected home repairs and upgrades, such as the installation of a new roof or replacement of a major appliance, according to recent research from the Society of Actuaries, a trade organization. That's followed by major dental expenses. (Medicare doesn't cover dental work and dental insurance often covers only routine expenses, said Cindy Levering, a retired pension actuary and a member of the society's Committee on Post Retirement Needs and Risks.)
Of the two, home expenses are easier to anticipate, yet often people still aren't ready. "People might know in the back of their minds that the roof needs replacing at some time, but they're not budgeting ahead of time," Levering said. "People tend to not plan for [non-regular home maintenance costs] in advance, and there's no insurance that you can buy that is generally going to cover that."
The research, which included a survey as well as focus groups of retirees of 15 years or more, found that 20% of retirees couldn't afford to spend $1,000 on an unexpected expense. Meanwhile, 10% said they could afford to spend $1,000 to $4,999, 11% could afford to spend $5,000 to $9,999, 12% could afford to spend $10,000 to $24,999 and 29% could afford to spend $25,000 or more. And 18% weren't sure how much they could spend. View survey results here.
And home expenses can snowball, said Anne Reagan, editor in chief of Porch.com, a website that connects users to home improvement professionals. "Something like [replacing] the roof could start at $20,000," she said. "Then, it's not just the roof but gutters, maybe the attic is leaking. There are a lot of things that can spiral out of control when [the home] is not maintained over the years."
Preparing for the unexpected
There are various ways people can prepare for the unexpected in their homes. One way is to sufficiently pad an emergency fund (which might be the best you can do if you live in a condo apartment and you have no idea when a special assessment might pop up). But for maintenance issues, you may want to create a separate fund.
Some financial planners will say to sock away a certain percentage of a home's value annually. For example, Cindy Richey, a financial planner at Prosperity Planning Inc. in Kansas City, Mo., advises an annual budget of 2% of the home's value for ongoing maintenance. Some years you'll spend more, some years you'll spend less, she said. (For a $300,000 home, for example, that 2% would be $6,000 every year, or $500 a month.)
"One thing I've noticed with people getting close to retirement: They tend to put a lot of money into their homes a year or two beforehand, like squirrels getting ready for winter," she said in an email interview. "It gives them a sense of relief, like 'OK, everything is done on the house. Now I can retire.' There is nothing wrong with that at all, in fact I think it's a good thing. But you have to keep in mind that home maintenance will still be needed over the next 20-plus years."
Another way to do it: Find out the life expectancy for your home's components, then do a home audit, estimating when you may need to make big purchases, Reagan said. That's more precise, since home maintenance will vary widely, based on factors including the home's age and location, she said.
List any and all upcoming repairs and maintenance, including the cost and time for replacement, said Niv Persaud, managing director at Transition Planning & Guidance, LLC, in Atlanta, Ga. Exterior paint, hot water heater, heating, ventilation, cooling and air conditioning, furnace, roof, kitchen appliances, carpet replacement and home furnishings (including mattresses, furniture, rugs and window treatments) should all be on the list. If you're planning on staying in your home as long as physically possible, also estimate how much you might need to spend on improvements as your mobility declines -- perhaps in chair lifts for stairs, wider doorways or walk-in tubs, Persaud added. Replenish the reserve as you use it.
To help get an idea of how long home components typically last, consider this document from the National Association of Home Builders. Or do your own research, calling service people or inquiring at a home improvement store.
It's also important to keep up on regular maintenance, from servicing the furnace annually to cleaning the gutters, so small problems don't escalate to larger ones, Reagan said. Keep in mind, too, that in retirement you may need to outsource some of the regular household upkeep that you used to take care of yourself, and that's going to increase your maintenance costs as well, she said.
"If you have a free standing, single-family home with property there might be quite a few tasks that you can't physically do," at some point in retirement, Reagan said. That means you'll be hiring someone, or "you don't do it and let it slide," which could set a home up for bigger problems down the road.