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Root canal, kaput refrigerator, major car repairs, expensive prescription, 🤑shopping cart dents your car😎
What do the above have in common? They can legitimately be called a financial emergency, and they can happen to retirees as well as anyone else.
New research from the Center for Retirement Research (How Much Are Emergency Expenses for Retirees and Are They Prepared?) shows that the typical retired household spends 10 percent of income on unexpected expenses in a normal year.
Further, “two in five households lack the cash to cover such expenses for just one year. And one in five falls short even after including retirement savings.”
“Retirees, tend to face larger spending shocks than workers, often driven by unpredictable costs such as healthcare. For that reason, retirees should consider holding three to six months’ worth of income in emergency savings,” according research by to J.P. Morgan.
I disagree that for those of us on Medicare, healthcare costs are a likely financial emergency. We can generally insure most of that. Long-term care is an exception, but that is generally a cost over time. Even high prescription costs are now limited to $2100 a year and thus can be planned for – with some funds set aside.
When our refrigerator froze its last leftover, it cost several thousand dollars to replace and we had to replace it quickly. I charged the cost to get 1.5% cash back and immediately paid the card balance from our ash reserves.
An emergency fund is not cash in the retirement account, it is outside retirement funds. We keep cash in our brokerage account, but also in our local bank account. But I admit, that cash is no where near 3-6 months of income. I think that amount should vary by the retirees income because many financial emergencies (such as a fridge) are not income related, with lower income retirees needing a larger reserve. What are your thoughts?
We add to the cash fund each month and as it has turned out the last year, that was necessary just to replenish it. I think replenishing such funds as needed should come from your ongoing income stream regardless of how you create income.
Seems to me we are dealing with poor benchmarks for dealing with emergency spending. The median income for all retirees is about $56,000. If we assume expenses follow income as they should, putting aside several months of expenses limits the amount of cash. Likewise a percentage of income as the researchers suggest.
The obvious problem is that financial emergencies are rarely absolutely relative to annual expenses or income.
If a fridge needs replacing it may cost 10% of a medium income retiree, but 5% or less of a higher income person. Medical and dental care expenses have nothing to do with income.
While working an emergency fund is generally for income replacement, in retirement it is quite different.
I include unexpected expenses in my budget – $1500 a month. If nothing bad happens, then I can spend the money on extravagances.
Of course, there is plenty more cash available if I need it.
We always have about 2 years of cash in a money market account in our IRA. This is replenished biannually when rebalancing. If we need money to pay for an “emergency” we just use that cash. So we don’t have a dedicated amount as an emergency fund, essentially all of our more than sufficient retirement account money is available for to spend on whatever we need to spend it on.
Is such an amount in cash to deal with market fluctuations too? Two years of cash seems beyond just an unforeseen expense.
The amount is 10% of our portfolio which covers roughly two years of expenses. Once we claim Social Security that will cover the majority, if not all of our expenses, then there will be very little in cash.
Ah, the delay social security conundrum.😎. Still can’t understand that strategy.,
I have seen some hellacious un-insured medical expenses. One client had $30K in dental related expenses. Roofs and HVAC systems run into the tens of thousands as well. So, yes, I think three to six months worth makes sense. Do retirees with less income need more? I suppose they do, but accumulating that much sure would be a challenge when more of their income has to be spent on the basic staples of life.
B Peterson suggests in his post that having a Home Equity Line of Credit (HELOC) in your back pocket is a wise choice. I agree. Now that we have been in our new home for over a year, we can get one. My local bank will set one up for free, but charges $50/year to maintain it. I passed on that, as some credit unions forgo that fee.
As you know, Dan it’s all relative. A lower income retiree could have 100% of income in cash and still not be able to pay that dental bill.
Medical and dental costs are generally thought of differently only because with some exceptions dental costs are more predictable and large costs are more easily preventable over time.
However, Connie goes to dentist regularly, but a few years ago we got hit with a $8,000 bill, but we had the cash in a HRA.,
We have been dealing with some chronic illness for several decades. Obamacare “affordable’ insurance was about $10,000 a year. Quite a hit when G lost her employer’s medical insurance.
We carry a true emergency fund. You could also think of it as a capital replacement fund. We drive our vehicles for 10-20 years. At the late stage there can be some large repair bills. Then there is replacement cost to plan for.
I do reasonable, preventative maintenance to keep everything in working order and extract full working life. But a new HVAC system is $20,000. Best to financially plan for these things
For those on Medicare health care costs are not an emergency? Does more than $10,000 in unexpected medical bills constitute an emergency? I suppose everything is relative.
We have been using Medicare for sixteen years. We have incurred hundreds of thousands in claims, well over $500,000 last count and growing. In none of those years did we pay more than the Part B deductible (with Medigap insurance).
What type of uncovered medical care are you referring to?
Rx used to be an outlier but now those costs are capped too and while they could reach $2100 in a year, they can be planned for, so a burden perhaps, but not an emergency expense.
We are extremely conservative when it comes to finances.
Besides our retirement funds we have after tax investments. Those after tax investments are about 2 1/2 year’s worth of our normal monthly expenses. We tap that for emergencies or other big ticket items.
We have very little debt. Just stuff we’ve put on our credit cards, which get fully paid off each month.
We have no mortgage or car loans.
We know we could be more heavily invested …. we know we have too much in cash or cash equivalents … but we sleep well at night knowing our bills won’t bother us.
My thoughts in retirement are the same as when I was employed. It’s prudent (just a rule of thumb), to have minimum 3-6 months worth of living expenses (not income) on hand for an emergency fund. Whether you have a big or small retirement income, I believe expenses are the more significant factor. If you have substantially more than the above saved for a rainy day then you my friend are abundantly blessed.
We have no emergency fund. Aside from the brokerage account we use as a high interest checking account to pay bills, everything else is the retirement portfolio. Currently my wife is doing a mega backdoor Roth and maxing out her pre-tax 401(k), and for expenses we’re spending down our taxable account. When we need cash to spend, I sell a stock fund and then rebalance in retirement accounts if necessary.
Interesting approach. Too risky for me though. What about the combination of needing cash and a market downturn? You aren’t concerned?
No, in that case I’ll sell money market and/or bond funds and buy stock funds in a retirement account.
I’m sure I’m a rare outlier. I essentially operate on a dual system. I have my core portfolio, this includes my stock and bond allocation plus two years of cash, which I use for retirement income alongside an annuity and an individual ten-year bond ladder. My entire retirement spending plan and lifestyle was built around this portfolio, accumulated over forty years of saving.
But I also have a separate, substantial pot of cash from selling my business ten months ago. Mentally, I don’t consider it part of my lifelong portfolio—I guess you could call it a multi-decade emergency fund.
We operate on a three part system. Income streams, (pension/Social Security), brokerage account which includes cash funds and a retirement account. In value the two accounts are about even, not planned but just worked out that way.
I would do the same with that pot of cash. Mentally I think of each bucket of money and in my mind for a set purpose.