Unfortunately, many retirees are unprepared for financial emergencies. While they may manage their day-to-day budgeting well, a significant percentage are completely unprepared for a financial crisis, and when an unplanned expense comes along, they are often forced to choose even more expensive financial decisions just to cope.
How An Emergency Expense Can Catch Retirees Off-Guard
Since most retirees are on a fixed budget, planning for monthly expenses such as your mortgage, utilities, transportation, food and other necessities is relatively easy. You might even build in a little cushion for discretionary fun. The problems arise when unexpected expenses hit, catching many retirees off guard. When it comes to retirement budgeting, expect the unexpected. Most retirees in their mid-70s and older say they can’t come up with the cash to cover an unplanned expense of $10,000. Even those in their 60s would have difficulty with a situation such as this. In fact, in 2018 CNBC reports that only 39% of Americans had enough in a savings to cover a $1,000 emergency, so how would someone who is retired and on a fixed income handle something 10x that size, or more?
A solid financial plan for someone who is retired is to make sure you have enough cash in an emergency fund to handle something like this. There are two surprise expenses that typically take retired folks off-guard, their house and – surprisingly – their teeth. “What tends to slip through the cracks are dental work and home repairs, two pricey expenses that often catch people unawares,” Money Magazine reports. “These two categories topped the list of financial shocks in retirement, followed by significant spending on prescription drugs.”
When Facing Emergency Expenses, Insurance Doesn’t Always Help
Many retirees seem to believe that homeowner’s insurance or Medicare will cover emergency expenses, but that isn’t always the case. Your homeowner’s policy typically covers damage from fires, floods, earthquakes and the like – depending on the terms of your coverage – but it generally doesn’t step in when you need to spend $15,000 on a new furnace or $10,000 to replace a worn-out roof. As for dental, Medicare doesn’t cover most routine procedures, and even Medigap and Medicare Advantage dental plans have severe limitations and co-pays that can cost thousands.
The solution is to have ready cash on hand, even if it’s in a savings account that earns meager interest. Your financial advisor will typically recommend that you keep three to six months’ worth of living expenses in a liquid account to deal with unforeseen expenses. Having ready cash is important whether you’re working or retired, since unplanned expenses can occur any time. If you don’t have cash available to meet the emergency, you’re often left with two unattractive options: either you are forced to liquidate part of your retirement, or you decide to pull out your credit card and borrow to pay the bill. In the first instance, you sacrifice your nest egg and the earnings it generates, and you might find yourself with a tax burden that makes the situation even worse. In the second situation, those credit card fees tend to pile up month after month as the hole grows deeper.
To make sure you have all the documents and plans in place for your retirement, we recommend joining us for one of our FREE Workshops where we partner with local groups such as Sound Options and Cay Care. We work together to help you find the solutions you need, so that you can rest easy that all your bases are covered. So that you can get on with enjoying your well-deserved retirement!
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