What are retirement’s big surprises?

Key Points

  • Most retirees will encounter at least one unexpected financial scenario
  • One-third of retirees increase their spending in the first six years after leaving work
  • Managing health care costs continues to be a big concern for retirees

A penny saved is a penny earned, as the old saying goes. When it comes to retirement spending, those savings could also translate to once-in-a-lifetime memories. So, how do you weigh those experiences against your future financial security?

This “spend or save” decision can be more crucial for retirees — especially with the latest data showing that assets may have to last longer than you think. According to the Social Security Administration, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.¹

For many retirees, the early years of retirement can be the trickiest to maneuver financially. The Employee Benefit Research Institute (EBRI) reports that in the first two years of retirement, 45% of households — across all income levels — spent more annually than they had prior to retirement. What’s more, 33% maintained higher spending in retirement through the first six years.²

One remedy for this early-retirement spending bump may be a longer-term view: Two-thirds of retirees with a financial plan in place prior to retirement have not had to make any adjustments to their plan yet, according to the Ameriprise Financial Pay Yourself in Retirement study.³

The operative word here is “yet.” The list of post-retirement tradeoffs is fluid and ever-changing, based on unexpected expenses, volatile financial markets, retirement dreams and a host of other factors exclusive to each individual’s or couple’s situation.

Chances are you’ll face at least one of these common tradeoff scenarios in retirement: 

Common retiree tradeoffs
  • Staying fully retired vs. going back to work for fulfillment or to boost retirement income
  • Taking more vacations vs. redirecting that money to a child's or grandchild's college fund
  • Choosing high-risk, high-return investments vs. moving assets to more conservative holdings
  • Withdrawing income vs. saving on taxes (83% of retirees with $1 million or more in savings say the tax treatment of investments is a key factor in deciding how and when to draw income)3
  • Living at home (aging in place) vs. assisted living or living with extended family

If you encounter any of the tradeoffs listed above, sit down with your spouse and/or other family members who may be impacted by your decision and make a pros and cons list for each scenario. Once you have a better idea of the repercussions of your decision, your advisor can help you understand how each outcome may impact your financial plan then assist you in adjusting your strategy as needed.

There’s another tradeoff that may merit more in-depth discussions: saving for health care expenses vs. spending money on just about anything else.

The X factor: Health care expenses

Almost half of retirees surveyed acknowledged that their health care expenses in retirement were higher than expected, according to the EBRI 2017 Retirement Confidence Survey.4

So, how did they react?

Half of the retirees surveyed reduced their spending by adjusting their budget, adapting or living within their means. And more than 20% drew down money from their savings and investments.

Unfortunately, this trend doesn’t seem to be waning. Retiree health care expenses are expected to rise at an average annual rate of 5.5% for the foreseeable future, according to HealthView Services’ 2017 Retirement Health Care Costs Data Report.5

The good news is that adequate savings, long-term care planning and thorough exploration of coverage options can go a long way in helping to protect your retirement investments from unexpected medical costs.

Your advisor can help

Determining which tradeoffs will balance short-term needs and wants with long-term goals while factoring in risk, return rates and tax liability can be confusing and complex. Your financial advisor can help explore options and identify the course of action that may be best suited to your unique circumstances.