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Dealing with Unexpected Expenses
Unless you're a multimillionaire, your concept of retirement and reality may be worlds apart. You envision daily rounds of golf, hitting the road in a huge RV and smacking down your Visa at every cash register within a three-state radius -- really living that bumper sticker that says, "We're spending our kids' inheritance."
Thing is, it may not be their inheritance you're spending, but your own hedge against inflation and unanticipated expenses. The bad news is the majority of future retirees won't have enough to meet their obligations without help. The good news? It's not too late to fix the problem. But there are drawbacks -- it takes time, hard work and commitment, not to mention self-denial and readjustment of expectations, to face retirement on solid ground.
Some bad luck you may run into
Additional (unanticipated) dependents. Your elderly parents need help. Your adult child hits a rough spot and moves back in. Suddenly, you're sandwiched. The income judged perfect for two must stretch to accommodate three or more people.
Big-ticket expenses. Your roof needs replacing. Your car, refrigerator or heat pump dies. Termites turn up in your walls. Have the cash to cover expenses like these?
Too much debt. You finance your car, put your clothes and groceries on credit cards and buy major appliances on time. Soon the interest piles up and your payments barely punch a hole in your original debt.
A bout of bad health. Escalating health costs continue to drive up out-of-pocket expenses. What happens when the cash you counted on to pay other bills must be diverted to health concerns?
Rising taxes. Maybe your taxes fall into the manageable range now, but what about in 10 years? Congress is already rumbling about raising taxes and that's not the only chunk of cash the government covets. Local property, sales and state income taxes are also almost certain to increase.
Landing another job post-retirement.For those whose plans include supplementing retirement income with another job, it might not be that easy. The entry-level job market for older workers seems to be shrinking and the jobs that do exist usually have few, if any, benefits.
Counting on your home's value to rise.Maybe. Maybe not. A home is worth only what someone is willing to pay for it. If you've neglected to keep up with the repairs, if it's a buyer's market, if the area in which it's located starts a downhill slide, then your home's value can take a dive.
The cost of living outpaces your income.Think that won't happen? How much was your electric bill 10 years ago? What about your other utilities? Or a gallon of gasoline or milk or pine cleaner or ... well, you get the idea.
If you're thinking, "This won't happen to me," here's hoping your trust fund's fat enough to see you through. Struggling to make ends meet isn't exactly how most see their golden years. But the good news is a financially secure retirement's still possible if you plan ahead.
Taking control: the story of Jack and Jenny
Jack, 62, is a military retiree. His wife, Jenny, 40ish, works on an assembly line and has some symptoms of repetitive motion-related health problems. Jack holds a part-time job that he's cut back on so he can keep his income low enough to pull down Social Security. His Social Security check is less than $900 a month; he also receives military retirement of less than $2,000 each month. They have one minor child at home.
Jenny's worried about their future because Jack earns only $11 an hour for three days' work a week. They have Tricare -- military health insurance for dependents and retirees -- and took out survivor's benefits for Jenny, so she'll continue to receive Jack's military retirement check if he should die.
They're several years away from paying off their home, but Jack's already trying to convince Jenny to secure a new conventional mortgage on the house once they own it, and use the cash to travel and buy a larger home, while renting the one they now occupy. He also wants to use Jenny's 401(k) plan -- the only retirement benefit she has associated with her job -- to pay for their son's education.
Jenny thinks both ideas are off the mark. She points out she is likely to outlive Jack and doesn't want to be left with a house payment on two homes, as well as no retirement income of her own.
Henry K. "Bud" Hebeler, former president of Boeing Aerospace and author of "Getting Started in a Financially Secure Retirement," gives Jenny high marks.
"It's not just what happens when he dies, it's all of the surprise events in retirement that cost money," Hebeler says. He also notes that depending solely on the government for most of your income is foolhardy.
"Don't forget the government is a sovereign power and can change the laws and pensions and tax rates and health insurance premiums," Hebeler cautions.
Hebeler's advice: Take nothing for granted. "It's commonly assumed that the government won't change pension rules for current recipients, particularly the military, but if the government is in economic trouble, even military pensions are fair game."
Means testing, changes in the index used for increasing military and other COLA pensions, and adjustments to medical insurance coverage all signal reductions in benefits.
Bottom line:"Unless you are a Microsoft heir, most people better find a way to start saving 20 percent of their income for retirement," say Hebeler, who runs a retirement Web site, www.analyzenow.com.
Pitfalls of keeping up with the Joneses
Consider this scenario: A couple eyeing retirement buys their dream home. It's bigger than the one in which they raised their children, and also comes with a hefty price tag. Even though they've sold their older home, they now face another decade or two of payments. That means they won't pay off their home until their mid-70s or 80s.
Dr. Marion Somers, author of "Eldercare Made Easier" (Addicus Books, 2006) and an eldercare expert, says to rein in status spending now. Instead, buy used cars, forgo the bigger house and make even your smallest expenditure count.
Bottom line:Cut up those credit cards and pay down your debts. Gauge your housing needs realistically. Before you relocate, look past the present. Will you one day need to return to be near family? Will your new home see you through your entire old age? And do you really need that McMansion or brand new SUV? "Say, 'Yes, I'd like to have it, but I've made the decision a new car is a waste of money,' and don't feel badly about it," Doctor Marion says.
Preparing for health care expenses
Arthur Koff, who runs www.RetiredBrains.com, says lots of retirees face barely scraping by because they're not fully prepared for changes in health and medical problems.
Estimates for out-of-pocket medical expenses not covered by Medicare run higher than $200,000 for 55-year-olds who will retire in 10 years, Koff says. "Very few couples have planned for this, resulting in retirees looking for employment after they thought they would no longer need to work."
That's another rub. Indications are that the job market for older Americans -- particularly in youth-dominated industries such as IT -- has cooled. The post-retirement position you need may not exist.
The bottom line:While it's good to work -- it helps keep you active and engaged in life -- if your financial health depends on a job after you retire, then you're not ready for retirement. Add to your other expenses out-of-pocket medical costs, and you might need to rethink things.
Stayin' alive: a tale of survival
Toni Oliphant, 68, of Wichita, Kansas, was a stay-at-home mom. Although she and her spouse carefully planned their retirement, an unanticipated divorce left Oliphant on her own.
Now she lives on less than $13,000 annually -- a combination of Social Security and an annuity. She sold her former home, which was remote and had a huge yard, and moved into Wichita to reduce the amount of upkeep. She says she'll pay her present place off in about five years.
Oliphant -- who suffers from diabetes -- makes living on a tight budget an art. "I waste nothing," she says. "When someone comes by and drinks part of a glass of water, most would pour the water out when they leave. I water my plants with it."
Oliphant doesn't have money to squander, so she shops like her life depends on it. Combining coupons and spending no more than $100 a month for food, she combs circulars for sales. She has family, but fights to preserve her self-sufficiency.
"You have to live within your means and a lot of people don't," she says. Living by her credo, "pay yourself first," helps her save money and waste nothing. "You don't have to start out with a big plasma television and a closet filled with clothes you probably won't ever wear," Oliphant says. "I come from a generation who uses things up before replacing them."
Aging expert Koff says the "average life expectancy for a 65-year-old woman is 86, but one-half will live longer and 20 percent will live past 95." The smart ones, like Oliphant, live as though they're in the 20 percent category. "You never know what life's going to throw at you," she reasons.
The bottom line: " I don't shop. My biggest thrill in life is seeing how much I can save. All my granddaughters do is shop until the stores close. You don't have to keep up with the Joneses," Oliphant counsels. "Besides, the Joneses are probably rolling in debt."
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