Unpleasant surprises in retirement aren't what you think
Large events that stress a nest egg are more common than you might imagine.
By Jeff D. Opdyke Rate.com
FEBRUARY 29, 2020 — 8:49AM
Unexpected financial shocks can be particularly stressful for retirees. Not run-of-the-mill expenses like, say, a higher auto insurance premium or a property-tax increase. We are talking about large events that stress a nest egg. They are more common than you might imagine.
Indeed, the Society of Actuaries’ Committee on Post-Retirement Needs and Risks has been working for two decades to better grasp how retirees manage financial issues.
The results: Nearly one in five retirees, and nearly one in four retired widows will experience four or more financial shocks.
Unexpected health care costs get a lot of attention, but the actuaries found that’s typically not the biggest bugaboo. Retirees who have Medicare and a supplemental plan (about 81% of them, according to Kaiser Family Foundation) typically have their medical bills well covered.
Instead, the actuaries report that, based on focus groups, the most common financial shocks are major home repairs (28% of retirees) and major dental costs (24%). The latter occurs because Medicare and most supplemental plans have weak or no dental coverage.
Other significant shocks include widowhood, divorce during retirement, long-term care expenses and adult children needing financial assistance.
The actuaries’ research suggests retirees are resilient, making necessary adjustments to their spending to cover the shocks. But those adjustments are often substantial, leading to a degraded lifestyle.
More than a third of retirees saw their assets decline by 25% or more. Roughly 10% had to reduce monthly spending by 50% or more.
Will you need $20,000 of emergency dental work in a few years? Will you and your spouse have to drastically reduce the assets on which you live? Will a hailstorm in 2023 damage your roof, allowing rain to seep in over time and rot walls and promote mold? Will an adult child need help?
Surviving such events means, of course, preparing for them, sometimes after you’ve retired. Building an emergency fund as large as possible is the obvious first step. That will help defray the costs of a new roof or a dental emergency.
Some costs, like long-term care, are beyond all but the biggest emergency fund. A long-term care policy is one option. Having a line of credit available can also help you navigate a financial shock. Most lines of credit are structured around home equity, and these days they charge interest rates of 4.3% to 6.5%. That’s substantially less than credit cards.