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Last November was a bad month for us. My wife went in for major dental work. We broke an expensive iPhone. My Forester needed two new engine seals. Altogether, the bills amounted to thousands of dollars. So much for our frugal retirement budget that month!

Even though we have substantial resources and try to live below our means in retirement, there is something about a large, unplanned expense that pushes my buttons. It’s partly the shock, partly the pain of having to part with a large sum of money, and partly the worry that, if this one surprised me, what other expensive surprises might lurk down the road?

I’ve been happily retired now for more than eight years, with my wife joining me about six years ago. For the most part, things have gone as planned, or even better. The bull market has continued far past its average. Our portfolio has done well, and smaller amounts of money have trickled in from side hustles and family inheritances.

Our retirement has been about as worry free as anyone could hope. But there are still events that can send a jolt of fear through my gut. The most common one is this: large, unexpected expenses.

Are these concerns big enough to threaten my emotional or financial security in retirement? No, not really. They don’t keep me up at night. The odds of us running out of money are slim. But they do remain the biggest wildcard in our lifestyle, the biggest question mark over whether we’ll live happily ever after, or not.

So, let’s dig a little deeper into the nature of unexpected bills in retirement. There are a half-dozen kinds of surprise expenses that I’ve observed or personally experienced. Some of these may be familiar to you too….

Medical/Dental

We retired early thanks to two key factors: My high earnings, and my wife’s retirement health insurance benefits. My six-digit salary and our frugal lifestyle resulted in substantial wealth accumulation. But, without health insurance, we couldn’t have afforded the risk of early retirement.

Even though her pension is minimal, my wife worked enough years as a public school teacher to qualify for retirement health benefits. We do have to pay for them, nearly $700 monthly. But it’s good insurance, a group plan with a major insurer, and mostly takes the risk of catastrophic health expenses off the table for us: The family in-network out-of-pocket maximum is $4,750, and out-of-network it’s $9,000. Though, even with our good insurance, overall health care expenses including insurance premiums have been approaching $20K annually in recent years.

Many of you are not so fortunate, of course. It’s a truism that health insurance is the #1 factor keeping many potential early retirees in their jobs. I won’t dig into the issue now because Chris and I have covered it extensively in many past posts on health care here. It’s sufficient to say that, while some strategies are available, there is no simple, slam-dunk solution for the general population of near-retirees to obtain foolproof health insurance in the U.S. now, or on the horizon.

However, even with our good medical insurance, dental costs are a concern. We have no dental coverage. My wife has problem teeth, and we’ve see dental bills approaching $5K in recent years, with more such likely to come. The dental insurance I’ve seen available so far is underwhelming, with relatively low annual maximum benefits. A quick search on eHealthInsurance reveals annual premiums in the range of $300-$500 for an annual benefit of $1,000 to $1,500. Not to mention coinsurance and paperwork requirements. It’s just not worth it to us. I’m not afraid of a $1K dental bill. I am afraid of a $10K one!

Housing

What’s the biggest single expense in most of our lives? Buying a home, of course. And so it stands to reason that housing would be one of the biggest potential sources of unexpected expenses.

An aging home, especially if you’re trying to preserve its market value and appeal, is an inevitable source of major surprise expenses. Roofs, gutters, siding, furnaces, air conditioners, appliances, plumbing, electrical, yards. Some of those expenses are in the five digits and hard to plan for. Water and time are the big culprits. No near-retiree owning a high-maintenance home can be completely assured of their annual retirement budget.

Are you a do-it-yourselfer who can handle most maintenance tasks without hiring a contractor? That’s a huge financial asset. But it still doesn’t defray your material costs. And it gets harder and harder to do-it-yourself, as you get older. (I haven’t noticed many 70-somethings working on their roofs.) Even if you’re physically capable of the work, you may not have the time or interest. I’ve done nearly every kind of house repair over the years and enjoyed virtually none of it. Replacing a toilet seal is the last thing I want to be doing at this point in life, and a major reason that we rent in retirement.

Insurance is not much of a solution for home maintenance expenses either. It is sometimes possible to buy maintenance policies to cover major systems, especially at the time you buy a new home, but when I’ve glanced at the details, they’ve appeared to be poor values, with short terms, high premiums, high deductibles, and yet more paperwork.

Then there is property tax, your annual obligation to the local government. A recent chat with a friend from the northeast reminded me that taxes in expensive jurisdictions can easily be triple that of low-tax locations. And you aren’t in control of rates or changes. In general, property taxes don’t skyrocket from year to year, but sometimes political shifts mean they do.

Renting solves much of the potential uncertainty around housing expenses. You won’t (immediately) get hit with big maintenance or tax bills. The great upside of renting is that all your housing expenses are predictable for the duration of your lease. But then there is that significant wildcard. Spikes in rent are routine as local economies and housing availability change. Or the property you’re in could change hands. And the cost of moving in search of lower rent is nontrivial.

Transportation

The second largest purchase for most people, other than their houses, is the vehicles they drive. Cars are expensive to buy or finance, and expensive to maintain once the warranty runs out. Repairs are unpredictable and can run into the thousands of dollars for major work.

Some people respond to that uncertainty by owning only relatively new vehicles. Or by leasing. Though most analyses, and my real world experience, indicate that the overall cost of owning and maintaining higher mileage used vehicles is usually less, to a point. For arguments’ sake, let’s say that vehicles with 30K to 150K miles are the “sweet spot.”

Unplanned major maintenance is the scary part. Last year a couple of seals started leaking on my Subaru Forester. The repair bill was going to be well over $1,000. And the car was only a few thousand miles out of warranty. Frustrating. After getting the quote from the dealer, I called Subaru’s national customer service line and pleaded my case with an attentive representative. He said he’d see what could be done, and get back to me in a few days. In the end they came up with a 50% cost reduction, credited directly to the dealer. The repair bill still stung, but not so badly.

Totaling a vehicle is another scary prospect. Most of us can’t do without our cars for any length of time. But, depending on your insurance and your liquid assets, it may not be a very big deal. We keep a $1,000 deductible on our auto insurance policies. And sales transaction costs on a new vehicle purchase are often in the $1,000 range. So it actually costs you maybe $2,000 to completely replace a vehicle after an accident. That’s a large unplanned expense, but would be manageable for most middle-income retirees, as long as it doesn’t repeat too often.

Emergency travel, helping out relatives, when there is illness or death in the family, is one of the larger wildcards in our lives. Buying plane tickets, booking hotels, and renting cars on short notice is usually an expensive proposition. I’ve seen bills in the $3K range for a family emergency. And it’s not hard to imagine scenarios involving more people or longer time spans where that could go much higher. Fortunately they are usually rare in most families.

Electronics

It sounds like trivia compared to the major life needs and expenses we’ve just discussed, but certain pricey electronics have become essential to modern life. Many of us own expensive cell phones and couldn’t get through a day without them. Tablets and laptop computers run a close second.

Replacing a cell phone or computer at short notice is typically a $500-$1,000 expense. Yes there are ways to economize. You can choose older models. You can use a lesser known carrier. And that will help. For myself, software was my business, and I’ve always unapologetically owned the fastest and latest models from the largest suppliers. Life is too short to wait on underpowered hardware in my opinion.

Breaking a cell phone screen used to be a major disaster. But now there are repair shops in most cities that can swap out a damaged screen and get you back online for $100 or so. That’s a big improvement over the full replacement cost for most phones.

What about cell phone insurance? For years I let Verizon charge me $2.99/month for an insurance plan from a 3rd party insurer. Then one year I needed it in an emergency, and discovered the so-often dismal reality of insurance: The deductible was sky-high and the paperwork burdensome. For starters, I couldn’t even get the insurer to return my phone calls! So I called Verizon instead and cancelled the insurance. I’ve self-insured my electronics ever since.

Moral: read the fine print, and barring overwhelming evidence to the contrary, assume that most insurance policies for personal property are not worth it!

In our house, we own a smaller, cheaper TV and watch it a few times/week if that. So a TV is not an essential appliance for us, and we could replace ours if necessary for a few hundred dollars. Other households will differ. But, since it’s not being carried around in your pocket, purse, or backpack during daily activities, a TV is at much lower risk for theft or damage than your portable electronics.

Family

We’ve already touched on emergency travel for illness or death in the family. Most of us will face that scenario at least a few times in our lives.

What about other family obligations? How about loans or gifts to children, relatives, or friends? Some of our largest unexpected expenses have fallen into this category.

Helping out family and friends financially is an extremely sensitive and personal area. It’s additionally complicated for early retirees, whose lifestyle may appear luxurious to uninstructed onlookers, but is in fact a carefully calibrated financial equation.

Being financially independent does mean you’ve accumulated significant wealth compared to the average worker. It doesn’t usually mean you can give much of that wealth away, without compromising your income and your independence.

Nevertheless, in some families, you could get hit with a request for money at short notice.

It’s probably wise to give some thought in advance to how you might respond. What needs justify financial help, in your opinion? How much can you afford? Will it be a gift or a loan?

While you can’t plan out all the details, you can at least map out your own personal philosophy for helping others in need, and that will have implications for your budget.

Legal

The last unexpected expense is one of the most unpredictable and frightening of all to me: legal trouble.

I haven’t studied the topic in depth, or had any personal experience, mercifully. But like most of us, I’ve heard stories, and seen friends impacted by unwarranted or unexpected legal challenges.

The most likely candidates for serious expense seem like liability exposure or criminal defense.

We carry umbrella insurance on top of our auto policy and, given the relatively low expense, it seems like a slam dunk for anybody with substantial assets. That said, an insurance company representative once confided in me that she hadn’t seen a single liability settlement in her several years at a sizable insurer. Personal liability lawsuits were relatively rare.

As with most insurance, I expect the insurers make out like bandits selling umbrella policies, with very few claims. But if you ever need umbrella coverage and don’t have it, you could be wiped out.

As for criminal law, I’d like to believe we live in a fair and just society and, if you live responsibly, you’ll never have a brush with the legal system. But I know that isn’t always so.

Nevertheless there are some personal strategies that I believe can minimize risk: Live in a small town or rural area, drive slowly and defensively, avoid conflicts with strangers, and don’t pick fights with individuals or institutions that are more powerful and have more resources than you.

If you exercise restraint and make intelligent choices, you can live a wonderful, happy life, even bend some of the rules, without getting into a fight you’ll lose. One of the most influential books in my life, How I Found Freedom in an Unfree World, has many more ideas and discussion along these lines….

The Biggest Expense of All

So there it is. Though I do not live in perpetual fear by any measure, my biggest fear in retirement, when I think about it, is a large, unexpected expense.

It’s a realistic concern. I’ve just reviewed a half-dozen such expenses that most of us won’t avoid completely. You can’t guarantee you won’t ever see these costs in your life, nor can you precisely budget for them.

So, aside from keeping some emergency cash on hand, what should you do?

Insurance is the traditional solution. And there are times when insurance is justified. I have no argument with home insurance, auto insurance, liability insurance, health insurance. (Or life and disability insurance while you’re still working.) The risks and risk pools are quantifiable enough that insurers can offer acceptable rates. And the downsides of going naked are extreme.

But most other forms of insurance, especially insuring personal property or less expensive transactions, look like a bad deal to me.

What other ways can you “hedge” risks? I’ve already mentioned living cautiously to minimize certain exposures. Lifestyle flexibility is always an asset: avoiding debt, keeping possessions to a minimum, maintaining good health, having the option to move or travel on short notice.

It can also be helpful in coping with unexpected expenses, and contribute to peace of mind, if you have some scalable retirement work income.

But there is one response to the risk of unexpected expenses in retirement that I avoided. I declined to work “one more year.” And another year after that, and another year after that, and another year after that….

If you use the fear of unexpected retirement costs to rationalize an unsatisfying job, and if you keep it up for too long, then you risk the biggest expense of all: throwing away precious years of your life, while never having truly lived.

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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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