Accidents can crop up at any stage in life. But when they occur in retirement, being prepared is crucial. Otherwise, you might find yourself short on funds during these hopefully relaxing years.
A recent survey from T. Rowe Price involving over 7,000 retirees worldwide revealed that only about a quarter (27%) felt equipped to handle financial surprises in retirement.
We reached out to financial planners to highlight the usual financial shocks retirees experience and how best to prepare for them.
“Being resilient in retirement isn’t about anticipating every expense. It’s about having a buffer and various options ready for when things don’t go as planned,” stated Mike Casey, a certified financial planner and founder of AE Advisors.
Medical expenses and long-term care costs
Generally, individuals qualify for Medicare at age 65. Still, there are many expenses that federal programs won’t cover. This often leads people to purchase supplemental plans to fill those gaps.
Even with these supplemental plans, some retirees still find themselves facing significant medical bills.
What this means for you
Unexpected costs can really strain your finances in retirement, so it’s wise to plan ahead, closely examine your insurance coverage, and hold some cash reserves to avoid having to liquidate investments in a downturn.
“Medical expenses represent one of the top financial shocks. These aren’t necessarily for serious illnesses, but they can still result in substantial costs that people often overlook,” noted Melissa Caro, CFP and founder of My Retirement Network. “There’s a significant gap between what Medicare and supplemental insurance cover, and many don’t realize how quickly this gap can widen until it’s too late.”
Additionally, it’s worth noting that neither Medicare nor supplemental plans cover long-term care expenses. Financial planners like Casey suggest evaluating your potential healthcare needs thoroughly before retiring.
“When considering health deterioration, longevity, or family emergencies, there’s often a behavioral tendency to ignore or delay confronting these risks,” Casey explains. “Reviewing your insurance coverage, which includes long-term care options and comprehensive liability, is vital.”
Housing costs
As you think about retirement or downsizing, keep in mind that housing expenses—like insurance and necessary repairs—can eat away at your retirement funds.
“Many retirees believe they can easily downsize if needed, without fully grasping the associated costs and timing,” Caro remarks. “Selling a house can be a lengthy process, often requiring repairs, staging, moving expenses, and potentially higher prices in a new area.”
Caro emphasizes that this can be especially challenging for retirees during economic downturns, forcing them to sell more assets to cover expenses.
One effective way to mitigate the risk of selling stocks during a bear market is to maintain a cash reserve for such occasions.
“The best way to prepare is by incorporating flexibility into your retirement strategy,” Casey advises. “This involves having a liquidity reserve in addition to your emergency savings, ideally enough to cover 12 to 24 months of expenses.”
