Even the most diligent pre-retiree planner can get tripped up by unpleasant financial surprises. Follow these tips. Getty Images By Mary Kane, Associate Editor December 26, 2019From Kiplinger's Retirement Report If you are nearing the end of your career or just starting out in retirement, you might assume it’s time for the careful financial planning you did all those years to finally pay off. You imagine a long-desired Alaskan cruise or map out cross-country trips to visit the grandkids. You picture filling your free time pursuing your interests in activities from biking to art.SEE ALSO: 15 Reasons You'll Go Broke in Retirement But even the most diligent pre-retiree planner can get tripped up by unpleasant financial surprises along the way. And if you’re not careful to avoid some of these shocks to your budget, they can derail your dreams and force a shift in your retirement goals. Consider just a few possibilities: You thought you’d have lower taxes as a retiree, but you land in a higher bracket instead as you begin to tap your qualified retirement accounts. You budgeted for Medicare payments, only to find your monthly premium is much higher than expected. You counted on your expenses shrinking in retirement, but you still have hefty bills for home maintenance and car repairs. That retiree health care from your employer that you figured was free? It actually costs hundreds of dollars each month in premiums. Even little things add up: You paid for expensive extended warranties that will far outlast how long you hold onto appliances or devices, or you forget to cancel costly recurring subscriptions for online services you no longer use. “I know what my regular monthly bills are, but I think it’s the unintended expenses, the major house repairs and other things you don’t plan on, that surprise you,” says Susan Garcia, 62, a former physician who lives in New Orleans and retired two years ago. “Your costs don’t really go down in retirement. They stay the same, and you don’t have 100% of the salary you had before.” Advertisement More people are likely to face this financial squeeze as they enter retirement with fewer resources than previous generations. A recent report by the Center for Retirement Research at Boston College notes that most adults approaching retirement are more reliant on retirement accounts built up during their working years than guaranteed pension income. If they have invested much of their savings in stocks, they are more vulnerable to sharp market downturns in early retirement. And nearly 80% of the spending needs of middle-income households entering retirement is earmarked for basic expenses, the study says. All told, it leaves retirees with little room for error. “Things that happen in the few years prior to retirement and the few years after can have a disproportionately large impact on your retirement years financially,” says Brook Lester, chief wealth strategist at Diversified Trust in Memphis. “Any kind of financial shock, like a large unexpected expense, a sick spouse or a big market downturn, can be hard to recover from.” Fortunately, there are moves you can make now to shore up your finances and head off unexpected hits to your retirement budget. Here’s a look at some of the nastiest retirement surprises—and how to handle them. Surprise No. 1: Medicare Costs More Than I Thought If you’ve never heard of IRMAA, you’ll want to know all about it before you retire. It’s the Medicare income-related monthly adjustment amount surcharge, and it refers to the extra premiums for Part B and Part D that higher-income beneficiaries pay for Medicare coverage. Advertisement In some cases, even a tiny increase in your income can put you in a higher income bracket and trigger the surcharge, meaning a married couple, for example, could suddenly be paying as much as $1,000 a month more than planned. And if you convert a traditional IRA into a Roth account, thinking it’s a smart strategy for avoiding higher taxes later in retirement, your additional income could put you in surcharge territory and wipe out some of your expected savings. SEE ALSO: Does Medicare Cover That? For 2020, the surcharge is triggered when your modified adjusted gross income—that is, your adjusted gross income plus tax-exempt interest income—exceeds $174,000 for taxpayers who are married and file jointly or $87,000 for individual taxpayers. Part B premiums combined with premium surcharges for Part B and Part D range from a total of $214.60 to $568.00 per month per person in 2020. (Read “Medicare Premiums Climb for 2020”.) Not only are many pre-retirees unaware of the surcharge, they also don’t understand how it works, says Forrest Baumhover, a planner with Lawrence Financial Planning in Tampa, Fla. For example, the surcharge is calculated based on your tax returns from two years prior. Many retirees know they might be subject to the surcharge, “and they dread it, but they don’t know what to do,” he says. Advertisement How to tackle it: If you are married and one spouse is still working, coordinate your health insurance coverage. One of Baumhover’s clients retired and realized he’d be hit with an IRMAA surcharge as he enrolled in Medicare. “We pointed out that he didn’t need to enroll in Medicare and pay the related IRMAA surcharge as long as she was still working and he was covered under her plan,” Baumhover says. The couple verified this with their local Medicare office, enrolled in her employer’s health care coverage and are dropping Medicare for now, saving over $2,000 per year in IRMAA surcharges, plus the standard Medicare premiums, he says. (Before using this strategy, confirm whether your spouse’s health plan requires you to enroll in Medicare at age 65. In companies with fewer than 20 employees, for example, the employer plan may pay secondary to Medicare when an enrollee is Medicare eligible.) You also can appeal the surcharge. Request a reconsideration by calling the Social Security Administration at 800-772-1213. An inaccurate tax return or a life-changing event, such as divorce or death of a spouse, can qualify for an appeal. Glen Turnes, 74, a retiree from Tampa, says his appeal was successful, and the process was less intimidating than you might think. Read your IRMAA notice carefully and follow the procedures for appealing, he says. Be sure to follow up and get help from a financial professional if you need it. Advertisement Surprise No. 2: My Tax Bill Went Up in Retirement How did that happen, when you expected it to go down? One possibility: You overlooked the fact that a portion of your Social Security benefits could be taxed. “It comes as a shock” to many retirees, says Paul Staib, a Highlands Ranch, Colo., financial planner. “People think of it as double taxation, and they get upset about it.” For married couples filing jointly with incomes between $32,000 and $44,000, 50% of benefits are taxable. And 85% of benefits are taxed at incomes above $44,000 for joint filers. (See Publication 915 at IRS.gov for more details.) Another potential tax shock: You followed accepted financial advice and saved for years in your tax- deferred retirement accounts, but you didn’t think about the tax bill that comes due when you start drawing down your money. Add in your retirement income from other sources, such as Social Security, pensions or deferred compensation payouts, and you easily can wind up in a higher bracket as a retiree than when you were working. This “tax torpedo” is a frequent and upsetting surprise, planners say. Consider a couple who saved every penny in retirement accounts that now have a balance of $3 million. Once they retire and begin to draw from those accounts, they realize that about one-third of each withdrawal will be consumed by taxes. Jane Upton, 69, who lives in Jacksonville, Fla., retired in 2017 and receives a pension from the city; her husband is still working. They now take distributions from her IRA to travel, because all their money is in tax-deferred retirement accounts, and they are feeling the impact of the tax on those distributions. Some of their more expensive trips—a Galapagos cruise, whitewater rafting and Grand Canyon camping—forced them to take IRA distributions much larger than the cost of the trip because of tax withholding. “I knew I was putting money into my retirement accounts at a pretax rate, and thinking, ‘I’ll pay the taxes when I get this out,’ ” Upton says. “But I was never really thinking how much it would be. Now when I’m looking at that whole nest egg, it’s like 28% of it I’m not going to get. That’s a shock when you think of it that way.” How to tackle it: The best way to avoid the tax torpedo is to start tax planning early. “Keep in mind that at some point the government is going to want its share of taxes,” says Mark Astrinos, a San Francisco CPA financial planner and member of the American Institute of CPAs Personal Financial Specialist Committee. Structure your retirement accounts to allow for potentially tax-free distributions or lower tax-impact withdrawals later. Consider Roth conversions, which Astrinos calls “the golden window of opportunity” for some retiring between ages 65 and 70. Perhaps they’re already on Medicare, their income has fallen, and they haven’t yet drawn on their Social Security benefits or RMDs. It’s their best chance to convert those tax-deferred accounts to Roth IRAs, paying taxes now at a potentially lower rate than after age 70. But be careful on timing, or you could bump up your Medicare premiums after a Roth conversion, he says. SEE ALSO: Taxes in Retirement: How All 50 States Tax Retirees If it’s too late to plan ahead, you still have alternatives. If you’re charitably inclined, use the qualified charitable distribution strategy, which involves donating IRA money directly to a qualified charity, lowering your taxable income at the same time. Bonus: The QCD can count toward your RMD. And alter your spending to cover your tax bills. Upton and her husband are replacing the major travel getaways they’d planned with smaller and less costly trips spread out over the year. Before they spend anything from a retirement plan distribution, they subtract about one-third of it to account for taxes and adjust their spending. “It means a trip I’m not going to take, or some other thing I’m not going to be able to do,” Upton says. She and her husband also expect to be in a lower tax bracket when he stops working in a few years. Surprise No. 3: I Downsized My House, but I Didn’t Get a Windfall You no longer need your rambling house and spacious yard, not to mention the upkeep. You assume a sure-fire way to build up retirement savings would be to sell it and move to a smaller house. But expecting a windfall from downsizing is one of the biggest fallacies about retirement savings, says Mike Kurz, chief executive officer of a financial planning firm in Frisco, Tex. On paper, swapping out the family house for a smaller footprint should cut your expenses. But moving is an emotional decision as well, Kurz says. If you have ties to your neighborhood, church, community organization or even the local coffee shop, you might hope to keep living there, just in a smaller house. But in an expensive neighborhood, you might still have a significant property tax bill even in a smaller house or find yourself limited to pricey rentals. Add in moving costs, real estate commissions, renovations or upkeep, and sometimes your move amounts to far less money saved than you thought. How to tackle it: Before posting a “for sale” sign, be sure you are committed to moving from a grand home to a more modest one, often in a different neighborhood, to save significantly. “You really have to be willing to sacrifice,” Kurz says. If you are on the edge financially and you can save $500 each month by moving to a smaller rental, getting rid of your house and mortgage makes sense. If you’re pursuing a major lifestyle change, you also might make it work. In north Texas, Kurz says, clients sometimes trade in their family home on a suburban cul-de-sac for a less expensive home in a rural community or farther out in the country. But be sure the savings will be worth it and that you won’t miss walkable streets or neighbors. You also want to avoid being isolated from relatives, friends and transportation. Surprise No. 4: I Retired Early, and Health Care is Expensive and Hard to Get If you retire before you’re eligible for Medicare and don’t have coverage through a spouse’s employer or other group plan, you’re on your own for health care—and it may not be cheap. Quit working at age 55, for example, when you’re still 10 years away from Medicare eligibility, and your coverage in the individual market may cost hundreds of dollars more than Medicare each month. “Having private insurance is just so expensive,” says Tiffany Beard, a financial planner with Wealth Enhancement Group, in Jacksonville, Fla. That’s particularly true if you don’t qualify for premium tax credits on the Affordable Care Act insurance exchanges. Early retirees may be able to tweak their retirement drawdown strategy to qualify for those tax credits. (Read “Shop Exchange Plans for a Better Deal”.) If you had employer health coverage and you’ve stopped working, you may be eligible for Cobra coverage. But be sure you understand you’ll be paying 110% of the entire cost, not just the smaller premium you paid while working. And Cobra is often limited in length; you may only be eligible for a year to 18 months. Louise Bryant, 59, founder of Financial Spyglass, a fee-only comprehensive planning firm in Rye, N.Y., and her husband both have small businesses and are no longer on their previous corporate health plans. Until recently, they paid $3,400 each month in Cobra premiums, which was much higher than their monthly health care cost under their corporate health coverage. And finding a plan on the Affordable Care Act exchanges hasn’t been easy. Even getting the information you need to coordinate with your doctors can mean numerous phone calls, emails and even office visits. “It’s a lot of work to wade through the options for coverage after Cobra and before Medicare as small business owners,” she says. How to tackle it: Check with your state to see how long you may be eligible for Cobra. For instance, if your coverage is from an employer based in New York state, you may be eligible for up to three years total of coverage under Cobra rather than the more typical 18 months. Bryant eventually found a plan for 2019 for $1,896, or $948 each, per month to cover herself and her husband. As of December 2019, her husband is covered by Medicare. And she has found one plan for 2020 that her doctors accept as “in network” that will be $1,137 a month. “It can work,” she says. SEE ALSO: Use an HSA to Boost Your Retirement Savings Alternatively, find a part-time job with health benefits; Beard says one client started working at a Publix grocery store for the benefits. If you have a health savings account, fund it to the maximum now so you can use it in retirement. Surprise No. 5: My Nest Egg is Disappearing Faster Than I Thought it Would You thought you had estimated your spending needs carefully before retirement, but you’re tapping your nest egg more often than expected. There’s the out-of-pocket costs for the hip replacement you didn’t expect or for the air conditioning unit that finally gave out. Watching your money dwindle away interferes with what are supposed to be your carefree years. Retirees regularly underestimate their costs in retirement, planners say. New Orleans retiree Susan Garcia, for example, says she “didn’t want to work until age 84” and tried to plan carefully for retirement with her husband, who had retired about 15 years before she did. But they still encounter expenses they can’t always plan for, such as a new roof on the house and other maintenance issues. How to tackle it: Creating a retirement spending budget and sticking to it are just as important as in your working days or when you were raising a family. Include everything from expected future costs for long-term care to everyday spending. Garcia and her husband, for example, researched local assisted-living facilities with their financial planner, Lauren Lindsay, to see what they could afford, and then included some $4,000 a month for care in the budget. Garcia also now factors in money for emergency maintenance and other needs, which offers some peace of mind, she says. Surprise No. 6: Long-Term Care is More Costly Than I Imagined You may feel set for retirement as you start out, but covering health costs in your early years can look much different than paying for care when you are older and ill. Even if you have long-term-care insurance, it will cover only a portion of your care. Many people also wrongly assume Medicare covers long-term care—but it doesn’t, except in very limited circumstances. And waiting until a spouse or parent needs help before figuring out how to pay for it may leave you scrambling for solutions and forced to pay even more for emergency help. Sherry McKinney, a financial planning professional with Stearns Financial Group, in Greensboro, N.C., dealt personally with the long-term-care-cost dilemma. Her mother had spent down her assets, and McKinney was going to step in and pay the costs of assisted living for her. Her mom fell and ended up in nursing care instead, “but when you are facing the payment of $3,000 to $4,000 a month, it is daunting and concerning,” McKinney says. “I had no idea that my mom would be in this weird zone where she makes too much money to qualify for assistance, but nowhere near enough to pay the cost of assisted living.” How to tackle it: If you have an extended family and it’s financially possible, you may need to have a family meeting and figure out whether everyone can pitch in for care. McKinney’s family—all four adult children and 10 adult grandchildren—decided to ask all its members to consider helping, even just a small amount on a monthly basis. She also regularly sees her own clients doing the same. SEE ALSO: The Impossible Reality of Long-Term Care Planning Alternatives can include having the children purchase a life insurance policy with a long-term-care rider for their parents, keeping in mind that this needs to be done before care is needed. The children who pay the premiums on the policy should be designated as beneficiary of the life insurance in the event the parents don’t need long-term care, McKinney says. Also, investigate whether you or a loved one might be eligible for veterans benefits or other assistance. Start your search at BenefitsCheckup.org.