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Planning for Retirement: Prepare for These 6 Surprises

Photo: Philip Brewer, Flickr

It's hard to do a perfect job when planning for retirement, because there are so many unknowns, such as what your vacations will cost. Still, we all need to plan as thoroughly as possible, and that includes bracing ourselves for some possible surprises.

At a minimum, planning for retirement should include estimating how much money you'll need in retirement and how you will accumulate that much. You're likely to have several sources of income to plan for, such as Social Security benefits; IRA and 401(k) accounts; regular, non-tax-advantaged saving and investing accounts; and perhaps one or more pensions or annuities.

You should prepare for the unexpected, too, such as the stock market taking a big dive just before or during your retirement, putting pressure on your planned withdrawals. As we approach and live in retirement, it's smart to shift a portion of our nest egg into bonds and less volatile investments than stocks. You'll still have a lot of money that you won't be tapping for a decade or more, though, and that's likely to grow fastest in stocks. When planning for retirement, be conservative and factor in some market mayhem.

Here are five more surprises you might encounter in retirement:

It might not happen when you expect
If you're planning for retirement at 62 and starting Social Security benefits early or perhaps planning to retire at 70 to get fatter Social Security checks – you might be surprised to lose your job at some other age. Give some thought to this possibility, and how you'll deal with it. It can mean that you suddenly have to pay a lot more for health insurance, for example. A good way to brace for this is to have an emergency fund that can carry you for a few months to a year, until you regroup. You might also develop some full-time or part-time job ideas to keep in mind, just in case.

You might miss working
Once you do retire, you might find, as many do, that they actually miss working, at least somewhat. You might miss having structure for your days and weeks, and the social connections of your workplace. You might find, after the novelty of retirement wears off, that you're bored. You can counter these feelings in a number of ways, such as by getting a part-time job, volunteering, exercising, joining a book club or investing club, and/or taking up new hobbies such as golf or knitting.

You might spend more or less than you planned
When planning for retirement, you can't pinpoint exactly how much money you'll need in retirement, but the more learning and thinking you do about it, the fewer surprises you'll likely encounter. Don't forget, for example, that you may face some occasional big expenses, such as a new roof, a new car, and a new fridge. Your aging parents might need some costly care, or perhaps a grown child will move back home for a while. Health-care costs can be far more than expected, too. According to the folks at Fidelity Benefits Consulting, "a 65-year-old couple retiring this year will need an average of $220,000 (in today's dollars) to cover medical expenses throughout retirement." That assumes they have Medicare coverage and doesn't include costs associated with nursing-home care. Long-term care is often another costly and unexpected necessity, often overlooked when planning for retirement. It's smart to consider long-term care insurance, though you may reasonably pass on it.

You might pay more taxes than you expected
When you stop working, your paychecks will stop arriving, but that doesn't mean that Uncle Sam won't still have his hand out. When planning for retirement, know that withdrawals from your Roth IRA or Roth 401(k) will be tax-free, but withdrawals from traditional IRAs and 401(k)s are taxable at your ordinary income tax rate. Even more surprising to many is that your Social Security benefits can be taxable, too!

The death of a spouse can hurt your retirement
If you're assuming that the financial loss from the death of a spouse will be offset by lower expenses (buying food for one less person, insuring only one driver, etc.), think again. When planning for retirement, know that pension benefits might shrink or stop when someone dies. With Social Security, survivors can switch to receiving their spouse's benefit if it's higher than their own, but they'll no longer be collecting both payouts. (One helpful strategy while both partners are alive is to delay starting to receive the higher-earner's Social Security benefit so that it's higher and will thus provide more for a survivor later.) Also, before either dies, if only one spouse has been managing the couple's finances, he or she should familiarize the other with all the accounts and information, lest the survivor end up not only in grief later, but also flummoxed by financial matters. 

Don't let unexpected developments derail a comfortable retirement. Be informed, be thorough in planning for retirement, and prepare for surprises.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

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  • Report this Comment On August 30, 2014, at 4:52 PM, xanaciowofi wrote:

    Also - don't be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.

    I would look at doing these 7 things:

    1) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Get insurance for $25/month from Insurance Panda. Forget about buying a house until your debts are paid off.

    2) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.

    3) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half - that's how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you're going to be transferred or relocate every 5 years, forget about buying a house and rent instead.

    4) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Raise chickens, breed dogs or grow apples. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.

    5) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.

    6) Make as much as you can. Save as much as you can. Give away as much as you can.

    7) Retire!- the sooner, the better. Be sure you understand that "retirement" doesn't necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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