How to Plan for 6 Surprise

Expenses in Retirement

What Unexpected Costs Do Retirees Face? 

  • Out-of-pocket health care costs average $6,833 a year for people age 65+.[1]
  • Long-term care could potentially cost retirees tens of thousands of dollars a year.
  • Some retirees fail to plan for taxes on retirement withdrawals and major home repairs.

Even the most carefully crafted retirement budget can suddenly take a hit from a large, unexpected expense.

It could be a massive tax bill, a furnace that quits in the winter or a major dental procedure that’s not covered by insurance. Though financial surprises like these are unlikely to derail your retirement, just one can set back your other plans, say, the next big vacation.

Anticipating the unexpected can help you plan for it. Here are six financial surprises that often catch retirees off-guard — and solutions to help prepare for them.

1. Health Care for Early Retirees

If you retire before becoming eligible for Medicare at age 65, you’ll need a plan for health insurance. Early retirees who shop for coverage often experience sticker shock.

Tip: The easiest and likely the least expensive solution is to be added to a spouse’s or partner’s workplace health plan.

If that’s not an option, the federal COBRA law allows you to continue coverage under your former employer’s plan for up to 18 months, provided your employer has at least 20 employees. (Most states have “mini-COBRA” laws that allow former employees to temporarily stay on a smaller employer’s plan.) Coverage under COBRA, though, is pricey because you can be charged the full cost of insurance – the employee and employer share – plus an administrative fee.

You can also buy coverage through your state’s insurance exchange available through Individuals may qualify for a federal subsidy in 2021 if their income doesn’t exceed $51,040 ($104,800 for a family of four), according to Kaiser Family Foundation.[2]

2. Medicare’s Monthly Premiums

Retirees generally aren’t charged for Medicare Part A (hospital insurance) because they already paid for it through years of payroll taxes. But they do pay for Medicare Part B (medical insurance) and the premium can be steep, depending on income.

Most enrollees pay the standard Part B monthly premium – $148.50 in 2021. But higher-income beneficiaries can pay as much as $504.90 a month.

Tip: The Social Security Administration calculates your Part B premium based on the income reported on your tax return from two years earlier. If your income has decreased since then because of a life-changing event, such as a divorce, death of a spouse or job loss, contact Social Security to readjust your premium.

Or, if you dispute Social Security’s decision for other reasons, you can file an appeal or what’s called a  “Request for Reconsideration,” available at or by calling at 1-800-772-1213.

3. Medicare Coverage Gaps

The federal program goes a long way toward picking up the tab for your medical care in retirement. But it doesn’t cover everything.

For example, Medicare Part B pays only 80% of approved medical bills. The other 20% is on you. And traditional Medicare doesn’t pay for services that are common in workplace plans, such as prescription drugs and routine dental and vision care.

Tip: You can purchase a Medicare Supplement Insurance (Medigap) policy that can help cover your 20% share. You can also buy prescription drug coverage (Part D) through Medicare and purchase policies covering dental or vision care from insurance companies, too.

Another option is to enroll in a Medicare Advantage plan (Part C) that’s offered by private insurers. It bundles Parts A and B – and usually Part D – and often provides extra benefits, such as routine dental and vision care.

4. Long-Term Care Costs

Medicare pays for a brief stay at a skilled nursing facility, often for rehabilitation after surgery. But you’ll bear the cost of extended long-term care, unless your income is low enough to qualify for Medicaid.

Not everyone will need long-term care, but it can be expensive for those who do. In 2020, the median annual cost was $54,912 for a home health aide, $51,600 for a one-bedroom at an assisted living facility and $105,850 for a private room at a nursing home, according to an annual survey by Genworth.[3]

Tip: Unless you plan to rely on substantial assets and essentially self-insure, you can buy long-term care insurance to help cover these expenses. A good time to shop for insurance is in your 50s when premiums are lower and you’re still healthy enough to qualify for a policy.

If you’re worried about buying insurance you might not use, consider a hybrid policy that combines life insurance and long-term care benefits. It will help pay long-term care bills if needed. And if you don’t require care – or only a little of it – your heirs will receive a death benefit.

5. Taxes on Retirement Income

Many retirees may find themselves in a lower tax bracket – at least initially – if they’re living on less income than when they were working. But they may still be in for some tax shocks.

For example, many people are surprised to learn that up to 85% of Social Security benefits are taxable, depending on their income. Here’s how to calculate whether your benefits are taxable:

  • Take half of your Social Security annual benefit amounts and add it to any other yearly income you receive.
  • If the sum is less than $25,000 and you’re single, or $32,000 if you’re married and file a joint tax return, your benefits won’t be taxed.
  • If income is higher, a portion of your benefits will be taxable.

Retirees also can be stunned when they’re bumped up into a higher tax bracket after turning age 72 and they start taking required minimum distributions (RMDs) from 401(k)s and traditional IRAs.  RMDs can also trigger a higher Medicare Part B premium or cause more of your Social Security benefits to be taxed.

Tip: Tax diversification can lessen the tax bite. By spreading your dollars across taxable, tax-deferred and tax-free accounts, you can make strategic withdrawals from them to minimize taxes.

6. Costly Home Repairs in Retirement

Appliances die, roofs spring leaks and carpets wear out. The timing may be uncertain, but it is inevitable that you will have one or more home maintenance expenses during a decades-long retirement. In fact, a major home repair or upgrade is the most common financial shock reported by retirees, according to a survey by the Society of Actuaries.[4]

Tip: To avoid being blindsided, create a home maintenance fund that you can tap when repairs or replacements are needed. One guideline is to save 1% of the value of your home each year in a maintenance fund. So, on a $300,000 house, you’d need to salt away $3,000 annually.

Keep the fix-it fund in an interest-bearing, readily accessible account that’s separate from your emergency fund or other savings. Barclays, for example, offers a no-fee online savings account with 24/7 access.

See how soon you can build up a cash reserve for home expenses or other needs. Use the Barclays Savings Assistant.