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How to Deal With a Financial Emergency in Retirement

Retirement Funding Managing Your Finances

Retired Military Officers are very fortunate as we have an inflation adjusted source of lifetime income.  That puts us in a pretty good place in retirement.  But it doesn't mean you can ignore the possibility of needing a large lump-sum amount of cash to take care of an emergency need.

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 or Your Military Pension

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

Your military retirement pension may make up the additional 40% mentioned above or perhaps even more.  But it still comes in one month at a time.  You can't get an advance if you have an emergency.

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

Military 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 and most likely you can't increase your income through going back to work if you're in the later stages of your retirement.

Don't Tap Investments  

Tapping into investments for emergencies can deplete a financial portfolio very quickly. This is especially true if you are forced to sell into a down market.

Tapping investments can also come with a tax bite.  If you have to take a large distribution from a tax-deferred account you could push yourself into a higher tax bracket, lose deductions based on your Adjusted Gross Income (AGI), or get a surprise in two years when your Medicare premiums go up based on your AGI from when you took the distribution. Taking funds from a taxable fund could cause similar problems.  With that said, not all of the withdrawal from a taxable account will be treated as taxable income.

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, might want to consider having 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 or potentially in Certificates of Deposit. 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 (as long as you're not taking significant losses by liquidating Roth IRA assets).
  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.  Or, cut non-essentials out completely
  4. Inventory your belongings and consider selling off some big-ticket items like jewelry or 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. You might also reap some dollars from the cash value of the policies

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

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