Many Retirees Don’t See This $7,100 Annual Expense Ahead. Is Your Nest Egg Safe?

Retirement should be a time when you finally relax, but for many, it’s also when financial shocks take their toll.

A recent study from the Center for Retirement Research at Boston College sheds light on just how expensive these times can be.

The researchers analyzed data from the Health and Retirement Survey and the Mail Survey of Use and Occupations 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 in dollar terms — such as an out-of-pocket prescription costing more than $500 or home repairs over $1,000 — to separate them from routine maintenance and predictable bills.

Research suggests that the average retired family spends about 10% of their gross annual income on unexpected expenses. That’s chump change, especially if you live on a fixed income.

The high cost of surprises

Research has found that 83% of retired families experience at least one financial shock in any given year, and they’re not cheap.

For households that did, the average annual cost was about $7,100. Researchers have divided this into three main categories:

• Family related events: This was the most expensive expense, about $5,700.
• Health problems: Unexpected medical expenses are estimated at $4,100.
• Rainy day events: Home and auto repairs are estimated at $3,300.

While you won’t face all of this every year, data predicts an average cost of $6,000 a year during retirement.

How good are retirees?

According to the study, the results are disappointing:

“[O]only 58% of all elderly households have enough money to cover their unexpected expenses for just one year. An additional 16% of households could cover their expense shocks for a year if they withdrew from their 401(k)/IRA assets.

However, that leaves 27 percent of families unable to cover just one year of unexpected expenses, even after using all of their savings and retirement assets.”

Strong on vulnerable groups. The study notes that in low-income households, about one-third can’t afford unexpected expenses each year, and tend to have limited non-cash assets.

The statistics are very similar in Black and Hispanic households. In families of widows and single women, almost half of them cannot handle unexpected debts.

Building a better database

Many financial experts recommend keeping three to six months’ worth of expenses in an emergency fund. However, based on these findings, retirees may need to look at their money differently.

Researchers suggest that you set aside at least 10% of your annual income for unexpected expenses. If you bring in $50,000 a year, that means having $5,000 accessible in case the furnace breaks down or a family member needs help.

Having enough savings can prevent you from selling your investments at a bad time or taking out high-interest loans. If your emergency fund is looking small, now is the time to start rummaging through it so you don’t get caught off guard.