Retirement should be the time when you can finally relax, but for many, it’s also the time when financial surprises take the biggest toll.
A recent study from Boston College’s Center for Retirement Research sheds light on just how expensive these moments can be.
Researchers analyzed data from the Health and Retirement Study and the Consumption and Activity Mail Survey between 2000 and 2020. They looked at thousands of households where at least one spouse was over 65 and retired.
They then defined unexpected expenses using threshold amounts – such as out-of-pocket prescription costs over $500 or home repairs over $1,000 – to distinguish them from routine maintenance and predictable bills.
The research shows that the average retired household spends about 10% of its total annual income on unexpected expenses. That’s quite a change, especially if you live on a fixed income.
The high cost of surprises
The research shows that 83% of retired households experience at least one financial shock in a given year, and these don’t come cheap.
For affected households, the average annual cost was about $7,100. The researchers have divided this into three main categories:
- Family related events: These were the most expensive, at an average of $5,700.
- Health problems: Unexpected medical costs averaged $4,100.
- Events on rainy days: Home and car repairs cost an average of $3,300.
While you may not have to deal with all of these issues every year, data predicts that the average cost during retirement will be $6,000 annually.
How prepared are retirees?
According to the researchthe results are discouraging:
“[O]Only 58% of all older households have enough cash to cover their unexpected expenses for just one year. Another 16% of households could absorb their spending shocks for a year if they also tapped into their 401(k)/IRA assets.
However, that leaves 27% of households unable to cover just one year of unexpected expenses, even after spending all their cash and retirement assets.”
It is more difficult for vulnerable groups. The research shows that low-income households can handle about a third of unexpected expenses within a year, and they generally have limited non-cash assets.
The statistic is virtually the same for black and Hispanic households. Of households with widows and single women, about half can handle surprise bills.
Build a better buffer
Most financial experts recommend keeping it three to six months of costs in an emergency fund. Based on these findings, retirees may need to look at their savings differently.
The researchers suggest setting aside at least 10% of your annual income specifically for unpredictable costs. If you bring in $50,000 a year, that means you have $5,000 available if the furnace breaks or a family member needs help.
Having enough savings can help you avoid having to sell investments at a bad time or take on high-interest debt. If your emergency fund is looking a little thin, now is the time to fill it up so you don’t get overwhelmed.
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