401k, Emergency Fund, Health, Retirement, Work
January 16, 2025
If you are nearing retirement, you have decades of experience dealing with the unexpected. When things don’t go exactly as planned or hoped, you have the muscle memory of what it takes to work through adversity. That’s just one upside of being older: experience in navigating through the unexpected.
But dealing with curveballs in retirement can be tricky. That makes it so smart to do your very best to arrive at retirement in the best possible financial shape.
I want you to put you and your retirement plan through an important stress test. How would you rate your retirement security if either of these happened?
You retire at age 62.
I know for many of you, that’s not the plan. You want to work longer. Perhaps you need to work longer. But here’s the thing: A big percentage of people who have retired said they had the same plan, but they ended up retiring years earlier than they expected. Not because they wanted to. Because their hand was forced: illness, a disability, or being pushed out of a career job.
What would your retirement look like if you retired at 62? Could you find part-time work to bring in some income? Could you continue with your plan to delay claiming Social Security? Would you have the mortgage paid off?
You are hit with a storm of unexpected expenses.
The car conks out, the roof needs replacing, you get big increases in your homeowner's insurance, or the rent increase is bigger than anticipated. What happens if there’s a year or two when you need more intensive medical care and are slammed with health insurance deductibles and copays?
If that were to happen, would you have the cash in an emergency fund to cover things? In a recent survey of retirees, 4 in 10 said they don’t have 3 months of living expenses set aside in an emergency fund. And to be clear, I think 3 months is an inadequate cushion! You should have at least 8 months (preferably 12 months) of spending needs set aside ready to tap for any of life’s unexpected expenses.
The great thing about stress tests is they are warning signals in advance of any real problem. They highlight a potential vulnerability at a time when you can do something to fix it.
To plan around the possibility of not being able to work as long as you anticipate, saving more now is one obvious move. If you are between the ages of 60-63, please know that there’s a new rule in 2025 that allows for super-sized 401(k) catch-up contributions. While anyone between the ages of 50-59 can contribute a total of $31,000 this year, if you are 60-63 the contribution limit is $34,750.
And now is the time to look for significant ways to reduce your spending. Maybe it’s downsizing, becoming a one-car household, or telling your adult kids it’s time for them to be entirely self-sufficient. Reducing spending is where you find the money today to build up your emergency savings. It also pays off by reducing the cost of supporting yourself in retirement.
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