Handling Retirement Financial Surprises

Financial surprises in Retirement can blow a hole in your plans. Particularly for early retirees, surprises are very damaging to well-laid plans.

The scenario occurs with frequency. A couple diligently worked up a detailed plan that covered all the expenses of their desired lifestyle. They ventured into retirement secure in the belief that they were financially comfortable.

Then, one or more major surprises surface. Unplanned medical expenses are a major shock to plans. Major home expenses, lower than expected investment returns, and family emergencies are other sources of surprise.

When paying for unplanned expenses retirees lose not only the cash paid for the expenses but all the future income it was expected to generate. Over a retirement of 10 to 30 years, that income is quite a sum.

When the unexpected jolt to cash flow arises, retirees needs to know how to respond. Here are some key strategies to consider.

• Plan for it. Annual spending in a retirement plan should include the irregular and even “unexpected” expenses. The spending plan should provide a place for the irregular cash drains. I often recommend that the monthly expenses include “sinking fund” expenses. For example, someone who plans to purchase a new car every four years would list a few hundred dollars for automobiles in the monthly spending plan. That amount won’t be spent each month. The sinking fund, however, ensures that when the spending numbers are run through a computer model the retiree has a better idea of whether enough really has been saved for retirement. Sinking funds can be set up for home repairs and even for unexpected emergencies.

• Save more. An alternative to the sinking fund is to establish a cushion in the retirement fund. Don’t retire until the fund has $100,000 or more beyond what is needed to generate cash for your planned lifestyle.

• Cut spending. Most retirement spending plans are flexible. There are variable expenses that can be cut or delayed. The typical retiree can spend less on travel, dining out, spoiling the grandchildren, and other discretionary items. The reduction does not have to be significant. A cut of 5% or so is enough to get most plans back on track.

• Back to work. Those who retired just a few years before the emergency often can return to work, even on a part time basis. They might do something similar to the work they retired from or seek other work to bring in a few dollars until the plan is back on track. More and more employers are “senior friendly,” so returning to work is a more viable option than it used to be. Many retirees who take jobs related to their hobbies instead of their old jobs find that the employment increases their enjoyment of retirement.

Retirees should expect the unexpected in their spending. The best solution is to have built a cushion in the retirement plan that anticipates the occasional unplanned expenses. Even when that wasn’t done, there still are options that can get the plan back on track.