You may not be planning to experience unexpected financial shocks in retirement. But you should agree with the results of a survey recently released by the Society of Actuaries Research Institute’s Aging and Retirement Strategic Research Program.
According to a recent SOA survey, roughly half of early retirees report experiencing some kind of unexpected financial shock, as do more than four in 10 retirees. And one in five early retirees report that these shocks have reduced their assets by 25% or more and reduced their expenses by 10% or more.
The good news is that far fewer retirees report these reductions, according to the 2021 Retirement Risk Survey Results Report. For example, only one in 10 retirees (11%) report that crises reduced their assets by more than 25%.
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Early retirees least prepared for a crisis
Other key findings: When asked how much they could spend out of pocket in an emergency without jeopardizing their retirement security, half of early retirees reported they could only spend $10,000 or less and more than half of retirees couldn’t. pay more. of $25,000. Black/African American early retirees (61%) are more likely than early retirees overall (40%) to be affected by an unexpected expense of up to $10,000.
Among retirees, Black/African American (58%) and Hispanic/Latino (52%) respondents said they cannot spend $10,000 without affecting their retirement security. This was much higher than the overall response from retirees (32%), according to the SOA.
So what to do with all this? How could you, whether an early retiree or retiree, better prepare for unexpected financial shocks?
Create an emergency fund
Most financial planners recommend that you have at least three to six months of living expenses set aside for emergencies or financial crises, like a new roof or dental work.
“Early in my career, a client in his 90s told me about financial assets, ‘You never know what it’s going to take to get you out of this world,’” said Bill Harris, certified financial planner. with WH Cornerstone Investments. “Your life wisdom of him was spot on. I use that quote to tell early retirees with ‘restricted’ retirement assets or insufficient funds that life takes unexpected turns. We also tell early retirees: ‘You can never save enough for retirement. You always need an emergency fund.’”
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Also create a reserve fund
Unexpected spending shocks are a reality at any age, said Roger Whitney, host of the Podcast “Retirement Answer”. “When they happen in retirement, after work income ends, they are not as easily absorbed and resolved,” he said. “To be better prepared, create options for your future self to deal with a shock. Building cash reserves on top of a normal emergency fund, eliminating debt to lower fixed monthly payments, or working part-time can help create financial slack to help you stay nimble as your retirement life unfolds.”
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What other funds do you have?
To better prepare for an unexpected financial hit, early retirees need an idea of other funds they might have access to, like a home equity line of credit or 401(k) loans, said Nicole Sullivan, co-founder and director of financial planning. on Prism Planning Partners.
If you plan to borrow money to cover any financial crisis, Sullivan recommends creating a plan to repay the borrowed funds. “It’s a must,” says Sullivan. “We all have ‘fluff’ in our budgets and cutting back is helpful.
If you can’t borrow money to pay for a financial shock or don’t want to borrow money, Sullivan says that “devising creative ‘side activities’ to generate additional income is a great option. what they would like to do once they have retired,” he says.
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Robert Powell, CFP®, is co-founder of finStream.tv and publisher of TheStreet’s Retirement Daily. Do you have questions about money? Email Rpowell@finstream.tv