By the time you get to retirement, you will have decades of experience knowing that life often throws unexpected expenses in your path. But a new study reports that most retirees aren’t financially prepared for handling these unplanned expenses.
According to the Center for Retirement Research at Boston College, annual unplanned expenses for retirees average about 10% of income. If your monthly retirement income is $4,000, that means in a typical year, you might have unexpected expenses close to $4,800. That’s a lot of extra money I don’t want you pulling out of retirement savings or putting on a credit card you can’t pay off in full. Yet the same report says that 40% of retired households don’t have enough stashed in an emergency savings account to cover just one year of unplanned expenses. Please don’t let that be you.
For starters, it can be so helpful to think about what surprise costs are most common for retirees. According to the study, these “spending shocks” generally fall into three buckets:
- Rainy Day Expenses: Classic unexpected costs for home and car maintenance and repairs average about $2,400 a year.
- Healthcare: Out-of-pocket medical costs average another $2,000 a year; Medicare doesn’t cover all your costs.
- Family Assistance: The average retired household spends about $1,700 a year in financial assistance for a family member.
Keep in mind these are averages. Your actual costs in any given year might be higher or lower, but planning for these categories will help you avoid being caught off guard.
You know my advice is for every household to work toward having at least eight months of living expenses set aside in an emergency savings account. A year is even better. This is just as important when you are retired; actually, it’s even more important. When you are living off a fixed income (your savings, Social Security, and maybe a pension) you really don’t want to be blindsided by a big emergency expense.
And I want to be clear: this emergency fund is in addition to my cash strategy for retirees. I advise all retirees to also have two to three years of living expenses not covered by Social Security set aside in cash. This is smart insurance for when stocks fall. In a bear market, you don’t want to need to touch any stock investments in your IRAs or 401(k)s. Having this chunk of money in cash will give you the time for your stocks to recover.
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