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Root canal, kaput refrigerator, major car repairs, expensive prescription, š¤shopping cart dents your carš
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.Ā
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, ātwo 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.āĀ
āRetirees, 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 monthsā worth of income in emergency savings,ā 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.Ā 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.Ā
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 ourĀ ash reserves.Ā
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?Ā
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.Ā
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 āemergencyā we just use that cash. So we donāt 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.