A financial shock could wreck retirees’ or pre-retirees’ finances: Here’s how to be ready

You might not be planning to experience unexpected financial shocks in retirement. But you should be according to the results of a survey recently published Society of Actuaries Research Institute’s Aging and Retirement Strategic Research Program. According to a recent Society of Actuaries survey, about half of the pre-retirees report experiencing some type of unexpected financial shock, as well as more than 4 in 10 retirees. And, 1 in 5 pre-retirees report that these shocks have reduced their assets by 25% or more and reduced their spending by 10% or more. The good news is that far fewer retirees report these reductions, according to the 2021 Retirement Risk Survey Report of Findings. For example, just 1 in 10 retirees (11%) report that shocks reduced their assets by more than 25%.

Pre-retirees least prepared for a crisis

Other key findings: When asked what they could afford to spend out of pocket on an emergency without jeopardizing their retirement security, half of pre-retirees report that they could only afford to spend $10,000 or less and more than half of retirees could afford no more than $25,000. Black/African American pre-retirees (61%) are more likely than pre-retirees in general (40%) to be impacted by an unexpected expense of up to $10,000. Among retirees, Black/African American respondents (58%) and Hispanic/Latino (52%) said they are not able to spend $10,000 without it affecting their retirement security. This was much greater than the general retiree response (32%), according to the Society of Actuaries survey. So, what to make of all this? How might you, be you a pre-retiree or retiree, better prepare for unexpected financial shocks?

Build an emergency fund

Most financial planners recommend that you have at least three to six months of living expenses set aside for, well, emergencies or financial shocks, such as a new roof or dental work. “Early in my career, I had a 90-plus-year-old client say to me regarding financial assets, ‘You never know what it will take to get you out of this world,’” said Bill Harris, a certified financial planner with WH Cornerstone Investments. “Her life wisdom was spot on. I use that quote to tell pre-retirees with ‘constrained’ or under-funded retirement assets that life has its unexpected turns. We also tell pre-retirees, ‘You can never ever save enough for retirement. An emergency fund is always needed.’”

Build a reserve fund too

Unexpected spending shocks are a reality at any age, said Roger Whitney, host of the “Retirement Answer Man” podcast. “When they happen in retirement – after income from work ends – they aren’t as easily absorbed or worked through,” he said. “To be better prepared, create options for your future self to deal with a shock. Building cash reserves above a normal emergency fund, eliminating debt to lower fixed monthly payments, or working part time can help create financial slack to help you be agile as your retirement life unfolds.”

What other funds do you have?

To better prepare for an unexpected financial shock, pre-retirees need a sense of other funds they might have access to such as home equity line of credit or 401(k) loans, said Nicole Sullivan, the co-founder and director of financial planning at Prism Planning Partners. If you do plan to borrow money to cover any financial shocks, Sullivan recommends creating a plan to pay back any borrowed funds. “It’s a must,” says Sullivan. “We all have ‘fluff’ in our budgets and trimming is helpful. If you can’t borrow money to pay for a financial shock or you don’t want to borrow money, Sullivan says “coming up with creative “side hustles” to bring in extra income is a great option. “Side work could also help pre-retirees explore what they might want to do once they’ve retired,” she says.a