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How to Deal With a Financial Emergency in Retirement


The coast of North Carolina is suffering in the wake of Hurricane Florence, leaving many retirees with extensive and costly damage to their homes. Unexpected and uncovered expenses can ruin any retirement plan. If your retirement income is static or your savings cushion isn’t there, you may have to take measures that could make your financial situation even worse.

First Things First: Maintain an Emergency Fund

A recent GoBankingRates study1 revealed some troubling findings: 

  • A whopping 69% of Americans have less than $1,000 saved.  
  • Only 37% of seniors 65 and older reported they had $1,000 in savings. 
  • A measly 23% of seniors have accumulated $10,000 or more in savings.

For most Americans the lack of emergency savings is problematic at any age. For older Americans that lack of additional security is particularly alarming. 

Don’t Rely Too Much On Social Security

Yes, Social Security is a reliable financial lifeline for many retirees. Unfortunately, Social Security will only replace about 40 percent1 of your pre-retirement income. You will need double that amount when you stop work.

So, the bottom line is that Social Security should not be considered a substitute for emergency savings. How much you should save depends on your circumstances, but plan on healthcare and homeowner costs as the biggest potential drains to your savings. Those costs come at a time when you already financially vulnerable.

Retirees Need More Savings Because Their Earnings Are Down

Time Inc. notes that retirees must have more savings than people who are still working.2 When you tap into your savings, you cannot easily replace them when you are no longer earning disposable income.

Don't Tap Investments  

Tapping into investments for emergencies can deplete a financial portfolio very quickly. For example, selling off your securities when the stock market is tanking will gouge out a bigger portion of your assets.

Think about the unpleasant tax implications. When you draw money from a taxable account, you are facing tax consequences. Drawing from those tax-deferred accounts might bump you into a higher earnings tax bracket. Ironically, when you withdraw money from those accounts in an emergency, the IRS taxes you further.

How Much Savings Should You Have on Hand?

Conventional wisdom is that everyone should have six to 12 months of money set aside to cover emergencies.2 Retirees, on the other hand, need to have emergency savings up at least 12 to 18 months of cash. 

Those savings are your safety valve and should be locked away in zero-risk savings accounts. You can calculate the exact amount with a simple monthly expense list. Kiplinger has a great household budget worksheet to help track your actual spending. 

5 Sources You Can Tap in an Emergency

So, you have tapped out your savings and are unwilling to liquidate your investments. Without resorting to bank loans and second (or reverse) mortgages, you can move forward without sinking deeper in debt by taking stock of your finances and cutting back.

U.S. News and World Report shares their top five suggestions:3

1. Use your emergency savings or accounts that have no tax impact, such as a Roth IRA.

2. Look at your monthly expense listing and cut back on non essentials like entertainment, dining out, and travel.

3. Economize on your monthly bills. Look for better deals in items like car insurance, cellphone and cable coverage. 

4. Inventory your belongings and consider selling off some big-ticket items like jewelry and your second car.

5. Talk to your insurance broker. Do you still need those whole life insurance policies that you bought decades ago? It may make sense to replace those policies with less costly term insurance to cover your final expenses.

Our team at Adams Chetwood likes to make sure that our clients are prepared for those unexpected expenses so that our clients can have a stress free retirement!

1 www.foxbusiness.com/markets/retired-you-still-need-an-emergency-fund

2 time.com/money/3950273/retirement-savings-emergency-fund-cash/

3 money.usnews.com/money/retirement/articles/2018-07-11/how-to-deal-with-a-financial-emergency-in-retirement

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.