Stefan Siems—Getty Images
December 3, 2018

When it comes to retirement budgeting, expect the unexpected. That’s the takeaway from a recent survey from the Society of Actuaries, which found that half of retirees in their mid 70s and beyond can’t cover an unplanned expense of $10,000.

Results were hardly better for older baby boomers, 41% of whom couldn’t come up with enough emergency savings, or younger boomers, 45% of whom would come up short.

The problem? People plan for things they spend regularly on, says Anna Rappaport, chair of the Society of Actuaries’ Aging and Retirement Strategic Research Program. That’s fine, but you should also budget for more periodic expenses. “The foundation of a solid financial pan is to make sure you have enough cash in an emergency fund to handle something like this,” Rappaport says.

‘Financial Shocks’

It’s easy enough to budget for known monthly expenses such as your mortgage, utilities, transportation, food and other necessities. Then you might build in a little cushion for discretionary fun.

What tends to slip through the cracks are dental work and home repairs, two pricey expenses that often catch people unawares, according to prior Society of Actuaries research. These two categories topped the list of financial shocks in retirement, followed by significant spending on prescription drugs, the Society of Actuaries found. Twenty-eight percent of retirees experienced major home repairs or upgrades, while 24% had major dental expenses.

It doesn’t help that insurance typically doesn’t pick up dental or home repair bills. Medicare doesn’t cover routine dental work, and the separate dental policies that some retirees buy don’t fully cover work such as implants, which can run upwards of $4,000 per tooth. Ditto homeowners’ insurance, which doesn’t normally pay for, say, a new boiler to replace the old one.

Financial advisors often recommend that people keep three to six months’ worth of living expenses in a liquid account to deal with such unforeseen expenses. The size of your emergency fund shouldn’t vary according to whether you’re working or not, says Chuck Mattiucci, senior vice president and financial consultant at Fort Pitt Capital Group, a wealth management firm in Pittsburgh. While you won’t get laid off in retirement, you will still encounter unplanned expenses, and having money in cash means that you won’t be forced to liquidate part of your portfolio in what could be unfavorable market condition — or worse, pull out your credit card — to pay the bill.

Interest rates have been rising, and now some online banks such as Ally and Synchrony are offering competitive rates of around 2% on their savings accounts, Mattiucci says, which should help ease the sting of having a big chunk of money sitting on the sidelines.


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