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  • Nate Carter

Plan for Replacement Costs in Retirement

When it comes to spending in retirement we expect the traditional daily expenses of housing, food, utilities and entertainment. However, some new retirees forget to save for the cost of replacing major items such as appliances or vehicles, or significant maintenance costs, such as repainting a home. Forgetting to save for these costs prior to retirement can lead to serious financial stress.

Replacement Costs Can Be Thousands of Dollars

A retirement budget should include $1,000 for a new fridge or $7,000 for a new heating and air conditioning unit. Each year certain items in your home will need to be fixed or replaced and some of these major expenses will occur in close succession. A major expense such as $15,000 to replace a leaking roof can derail spending plans if you have not budgeted for them in advance.

Risk of Relying on Credit Cards

Relying on credit cards for these replacement costs can quickly put retirees in financial trouble. An $8,000 expense paid for with a credit card charging 17% will cost $1,360 in interest after a year. The total cost is now $9,360 because credit was used instead of savings. The interest payments on credit cards quickly eat away at monthly budgets, especially in retirement when most people are on a fixed income. Holding a large credit card balance can also damage your credit score which leads to higher interest rates when applying for mortgages or other loans.

Plan for Replacement Expenses

A person who retires at 55 and hopes to live to age 85 will have multiple stages of replacement costs over their life. Over these 30 years a retiree may replace their roof twice and their vehicle three times. They can also expect to buy two stoves, three refrigerators and three sets of washing machines and dryers. These costs add up and their prices will increase over time due to inflation. To be well prepared for these expenses in retirement it helps to make a list of these items along with their expected longevity and cost.

Item Longevity Estimated Cost

Vehicle 10/12 years $40,000

Roof 15/20 years $18,000

Refrigerator 10 years $1,000

Stove 10 years $1,000

Painting Exterior 7 years $6,000

Painting Interior 7 years $5,000

HVAC 10 years $8,000

Dishwasher 7 years $1,000

Washer/Dryer 7 years $2,000

Water heater 7 years $2,000

Total $84,000

Make Repairs Before Retiring

As the list above shows, the first decade of retirement may require $84,000 in replacement costs. At an average of $8,400 per year this could be a sizable portion of a retiree's annual budget. There are three ways to prepare for replacement costs in retirement.

First, pay as many of these expenses as possible prior to retiring. Replacing a car, painting the house, replacing the stove, and repairing the roof can ensure these expenses are deferred for the first several years of retirement.

Create a Fund for Replacement Costs and Save Monthly

Second, set aside a sizable amount of savings in a "replacement costs" fund prior to retirement. This provides a financial cushion when these expenses emerge early in retirement.

Third, automatically save a certain amount each month while in retirement to replenish this fund. The list above shows a retiree should be saving at least $700 per month in their replacement costs fund. If your current retirement plans cannot afford these expenses you need to look at ways to increase your savings before retirement.

Following these three steps will protect against unanticipated replacement costs and help smooth monthly spending in retirement. And remember, the key to a successful retirement is eliminating as much financial stress as possible.

If you are interested in more ideas to prepare for a successful retirement consider these eight questions, as well as strategies for withdrawing funds in retirement as well as focusing on where savings are invested instead of the size of a retirement portfolio.

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