How to prepare for a sudden financial crisis


You may not expect to experience unexpected financial shocks in retirement. But you should be, according to the results of a recently released survey from the Society of Actuaries Research Institute’s Aging and Retirement Strategic Research Program.

According to a recent Society of Actuaries survey, about half of pre-retirees say they have experienced an unexpected financial shock, along with more than 4 in 10 retirees. And 1 in 5 pre-retirees say these shocks reduced their assets by 25% or more and cut expenses by 10% or more.

The good news is that far fewer retirees are reporting these reductions, according to the 2021 Retirement Risk Survey Results Report. For example, only 1 in 10 retirees (11%) say shocks reduced their assets by more than 25%.

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Pre-retirees least prepared for a crisis

Other key findings: When asked what they could afford to spend out of pocket in an emergency without compromising their retirement security, half of pre-retirees said they could not afford to spend that $10,000 or less and more than half of retirees could not afford more than $25,000. Black/African American pre-retirees (61%) are more likely than pre-retirees in general (40%) to be affected by an unexpected expense of up to $10,000.

Among retirees, Black/African American (58%) and Hispanic/Latino (52%) respondents said they couldn’t spend $10,000 without it affecting their retirement security. That was far more than the overall response from retirees (32%), according to the Society of Actuaries poll.

So what do you think of all this? How could you, whether you are pre-retired or retired, better prepare yourself for unexpected financial shocks?

Create 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, like a new roof or dental work.

“Early in my career, a client over 90 told me about financial assets, ‘You never know what it will take to get you out of this world,'” said Bill Harris, a financial planner chartered with WH Cornerstone Investments.”His life wisdom was spot on. I use this quote to tell pre-retirees whose retirement assets are ‘constrained’ or underfunded that life has its unexpected turns. We also say to pre-retirees “You can never save enough for retirement. An emergency fund is always needed.”

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Build up a reserve fund too

Unexpected spending shocks are a reality at any age, said Roger Whitney, host of the Podcast “The man who answers retirement”. “When they come in retirement – after work income ends – they’re not as easily absorbed or worked on,” he said. “To be better prepared, create options for your future self to deal with shock. Building cash reserves on top of a normal emergency fund, eliminating debt to reduce fixed monthly payments, or working part-time can help create financial slack to help you be nimble as you go. your retirement life unfolds.

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What other funds do you have?

To better prepare for an unexpected financial shock, pre-retirees need to have an idea of ​​what other funds they might have access to, such as a home equity line of credit or 401(k) loans, said Nicole Sullivan, co-founder and director of financial planning. at Prism Planning Partners.

If you plan to borrow money to cover any financial shocks, Sullivan recommends creating a plan to repay the borrowed funds. “It’s a must,” Sullivan says. “We all have ‘stuffed animals’ in our budgets and the cuts are useful.

If you can’t borrow money to pay for a financial shock or don’t want to borrow money, Sullivan says “offering creative ‘side-businesses’ to generate extra income is a great option.” Side-work could also help pre-retirees explore what they would like to do when they retire,” she says.

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Robert Powell, CFP®, is co-founder of and editor of TheStreet’s Retirement Daily. Do you have questions about money? Email [email protected]


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