Unexpected Expenses and How to Plan for Them

By Chris Duderstadt

July 27, 2023

Unexpected Expenses and How to Plan for Them

Key Points – Unexpected Expenses and How to Plan for Them

  • Reviewing Examples of Unexpected Expenses
  • The Many Unexpected Expenses That Can Rise from a Natural Disaster
  • The Two Biggest Wealth-Eroding Factors in Retirement: Health Care and Taxes
  • Stress Testing Your Financial Plan
  • 8 Minutes to Read | 23 Minutes to Watch

What Unexpected Expenses Can You Encounter Leading Up to or in Retirement?

What do a flooded basement, trip to the emergency room, and helping one of your children who was laid off have in common? Well, obviously none of them are ideal situations, but there’s more to it than that. They’re all unexpected expenses that can significantly impact or even derail your retirement if you haven’t planned for them.

Some Alarming Statistics About Financial Well-Being and Unexpected Expenses

The Economic Well-Being of U.S. Households in 2022 helped shed some light on how a wide variety of unexpected expenses is negatively impacted the economic well-being of Americans. Here are a few eye-popping statistics from the report, which used data from the 2022 Survey of Household Economics and Decision-making (SHED) survey.

  • In 2022, 63% of adults indicated they would pay for a hypothetical $400 emergency expense exclusively using cash. In 2021, it was 68%.
  • Instead of asking the people in the SHED survey how they would cover an emergency unexpected expense, they were asked about the largest expense they could pay for with their savings. Eighteen percent of the people survey indicated that it would be under $100, while 14% said between $100 and $499.
  • Nearly two-thirds of the people surveyed stopped using a product or used less of it due to inflation. Sixty-four percent of the respondents shared that they switched to a cheaper alternative product, while 51% cut their savings due to price increases.

Planning for Unexpected Expenses

But how do you plan for unexpected expenses? Well, that’s where we can come in to help. You do so by creating a forward-looking financial plan and working with a team of financial professionals. Let’s look at some specific examples of unexpected expenses to highlight the importance of planning for retirement.

Natural Disasters

A couple of weeks ago, some damaging storms ripped through the Kansas City area and impacted thousands of people nearby our Lenexa, Kansas, and Lee’s Summit, Missouri offices. There were high winds that knocked down big branches and even uprooted trees. Unfortunately, some of those trees landed on cars, power lines, and houses.

There were some people who went days without electricity. That meant possibility needing to find a temporary alternative place to stay (not only for people, but their pets too) with limited options to choose from. No power for multiple days also forced people to lose everything that was in their refrigerators and freezers.

Kansas City has been far from the only city in the U.S. to experience extreme weather conditions that have resulted in unexpected expenses for people this past month. There has been devastating flooding in the Northeast that has created some similar unexpected expenses. Extreme heat has put HVAC units into overdrive throughout the South. And then there are our neighbors to the north that are dealing with historic wildfires. Significant portions of the U.S. have been dealing with smoke and very poor air quality because of them.

Are Your Insurance Policies Up to Date?

But how do you plan for unexpected expenses that could range from significant food loss, tree removal, water damage, new electrical poles, vehicle repair/replacement, and house repair/replacement? These are examples of why being up to date with your insurance policies is critical. That includes home owner’s insurance, car insurance, health insurance, property and casualty insurance, life insurance—you name it. Do you know what your policies cover? Risk management is one of the core components of a financial plan.

“All too often, we see people that get property casualty insurance, and they just keep paying the premium. They don’t go back and look at those policies and determine whether their coverage is what it should be to understand what their maximum out-of-pocket expense is going to be if something unexpected did happen and if they can handle that? You need to have that money in cash reserves.” – Dean Barber

We also need to keep in mind that there are going to be expenses with your house, car, and other property just from wear and tear. Those expenses aren’t necessarily unexpected. Over time, you’re going to need a new car, HVAC system, tree trimming, housing appliances, etc. Those are expected expenses that you need to plan for by setting up a spending plan for retirement.

The Two Biggest Wealth-Eroding Factors in Retirement

Speaking of setting up a spending plan for retirement, let’s think about the two biggest wealth-eroding factors in retirement. We’re talking about health care and taxes. Let’s start by discussing unexpected expenses with health care and how to plan for them.

We’ve all felt inflation’s impact over the past couple of year at the grocery store, gas pump, and especially with health care costs. Health care costs have been inflating at an even higher rate than consumer goods. Therefore, you need to apply a higher inflation factor to health care costs within your financial plan.

We certainly hope you and your spouse won’t ever require a long-term care stay—or at least not anytime soon. But even though long-term care stays are rarely expected, the odds of at least one spouse requiring one at some point is likely. If you’re not planning for that unexpected big expense, your retirement plan isn’t complete.

Stress Testing Your Financial Plan

You plan for that possibility by stress testing your financial plan. When you stress test it, you’re figuring out what would happen if you and/or your spouse needed to spend three, four, five years in a long-term care facility. What’s the cost where you live? Build that into the plan. What did that do to your plan’s probability of success?

 “If the plan still is successful and it doesn’t derail the healthy spouse’s ability to continue to live the way that they want to live, that means you’re self-insured. You have the resources to cover both. If it begins to cause a significant question mark as to whether the plan could sustain itself, then you look to insurance.” – Dean Barber

What all are you considering with health care coverage—whether it’s Medicare or health insurance options prior to 65? In the end, we must remember that our health is our wealth and that time is our greatest commodity.

What If One Spouses Passes Away Unexpectedly?

One of Bud Kasper’s clients just passed away unexpectedly. So, now, the game has changed for the surviving spouse. They’ll go from married filing jointly to being a single taxpayer. The surviving spouse will also end up getting the highest of the two Social Security benefits that the couple had. The lower benefit will go away, though. There are a lot of unexpected expenses that can up if you don’t account for the possibility of a spouse passing away unexpectedly within your financial plan.

“We had planned for that. I’m not saying we planned for someone to die. We planned for those type of events where you need to shift from a couple’s plan to a single plan. We need to anticipate these things.” – Bud Kasper

You Don’t Know What You Don’t Know

Now, let’s move on to the other biggest wealth-eroding factor in retirement: taxes. Taxes can be a very unexpected and unwelcome expense if you don’t understand that how much you save and where you save to matters. Do you understand the tax implications of how you’re investing?

Many people assume that they’ll automatically be in a lower tax bracket in retirement. Unfortunately, those people are probably unaware that the Tax Cuts and Jobs Act is scheduled to sunset in 2026, which means tax rates will revert to the higher rates of 2017. While 2026 is quickly approaching, there’s still time to plan for those unexpected expenses. That starts by working with a tax professional that can show you what tax planning strategies are available to you.

The tax code is extremely complex. Our Director of Tax Corey Hulstein and team of in-house CPAs will be the first to tell you that. Along with working alongside of our CPAs, several of our CFP® Professionals study with America’s IRA Expert Ed Slott to get a better understanding of the tax code. We, in turn, pass that knowledge along to our clients and prospective clients.

Planning for Unexpected Expenses with Our Retirement Plan Checklist

One way that we’ve been helping people plan for unexpected expenses is through our Retirement Plan Checklist. It consists of 30 yes-or-no questions to gauge your retirement readiness and an age-based timeline of items to plan for as you’re approaching and going through retirement. Download your copy below and go through the checklist with your spouse as well.

Unexpected Expenses

Retirement Plan Checklist

Family Financial Planning

We want to make sure that you don’t get blind-sided by unexpected expenses such as excess tax. And we don’t want your loved ones to be blind-sided either. If you’re passionate about leaving a legacy to your children and grandchildren, you and your loved ones need to understand the various rules of wealth transfer when it comes to your assets. IRAs, for example, are no longer a good wealth transfer vehicle because of the taxation to the next generation.

Thanks to the SECURE Act, beneficiaries of inherited IRAs must empty the account within 10 years of the account owner’s death. An unexpected expense with this comes in the form of penalties for missed Required Minimum Distributions. The rules for RMDs have changed a lot since the SECURE Act became law. People of different ages have different RMD rules to follow due to having different required beginning dates. It’s critical to work with a CFP® Professional so that you understand the rules that you need to follow for RMDs and, more importantly, how to avoid them altogether and mitigate taxes.

“If you have money in Roth IRAs and you convert a lot of those Roth IRAs in your early years of retirement, then you eliminate Uncle Sam from that IRA piece of your retirement plan. And it kicks out that one of the biggest wealth-eroding factors out there.” – Dean Barber

It All Starts with a Financial Plan

We’ve covered a wide range of unexpected expenses and could certainly rattle off several more. The bottom line is that you need to have a financial plan that can help you plan for those unexpected expenses. And that plan needs to be unique to you. It should be centered around your goals for retirement and then be updated as you approach and go through retirement. Because your goals and what’s important to you will change over time.

And, unfortunately, unexpected expenses will arise over time as well. You need a plan in place for how to cover them. To start building your goals-based financial plan today, take our industry-leading financial planning tool for a spin. You can use it from the comfort of your own home by clicking the “Start Planning” button below.

Can I Retire Early


Do You Have Any Questions About Unexpected Expenses That You Might Encounter?

As always, if you have questions about unexpected expenses and how to plan for them, we’re here to help. You can schedule a 20-minute “ask anything session or complimentary consultation with one of our CFP® Professionals by clicking here. The setting of the meeting can be in person, virtual, or by phone—whatever works best for you.

We hope that this discussion about unexpected expenses has shed some light on the importance of retirement planning. If you know someone who is dealing with an unexpected expense and is unsure how to move forward, please forward them this article and/or have them reach out to us. We welcome the opportunity to assist them as well.

Unexpected Expenses and How to Plan for Them | Watch Guide

00:00 – Introduction
01:30 – Why Planning for the Unexpected Matters
03:00 – Examples of Unexpected Expenses
04:30 – Two Biggest Wealth Eroding Factors in Retirement
05:21 – Bud Has a Surprise for Dean
06:38 – TRIVIA
10:32 – Long-Term Care Expenses
12:09 – Life Insurance and Critical Care Rider
15:33 – Becoming a Single Tax Filer
18:04 – Build a Plan, then Stress Test
22:12 – What We Learned Today

Resources Mentioned in This Article


Past Shows


Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.