Retirees living on a fixed income could be at risk in the event of an emergency expense. Here are some of your options if you don’t currently have an emergency savings account.
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Retirement is the light at the end of the tunnel for many Americans in the workforce. Many work tirelessly throughout their life to ensure they can kick back and relax later in life without having to worry about their finances.
However, financial security for retirees is still up in the air. Retirement-aged Americans report the lowest rate of financial improvement of any generation. According to a new study from Bankrate, 76 percent of Americans ages 65 and older say they feel their financial situation has not improved under the current administration. Between Social Security and Medicare cuts and the rising cost of living, many Americans are concerned their finances aren’t where they need to be to retire comfortably.
Unfortunately, emergency expenses pose a real threat to the financial security of retirees. Studies have shown that those 65 and older are less likely to have a separate savings account from their retirement funds. Due to a slightly higher risk of health-related or other emergency expenses, retirees in this age bracket may not be able to cover an unexpected expense.
Financial emergencies in retirement
Adults over the age of 65 are at higher risk for health issues, such as arthritis, heart disease, cancer, respiratory diseases and more, making emergency medical expenses more likely. The Center for Retirement Research reports there is a significant increase in the percentage of families making “extraordinary” medical payments for older members in their households.
Retirees may also be more likely to have an older home requiring major repairs. Roof leaks, HVAC issues and other common home repairs can cost hundreds or thousands of dollars. Those living on a fixed income might have trouble absorbing those costs without help from an emergency fund.
Of course, retirees are also at risk to some of the same emergency expenses as other demographic groups: natural disasters, car troubles, last-minute travel, pet expenses and more.
Why are emergency expenses potentially more dangerous for retirees?
Most retirees live on a fixed income from Social Security benefits or a tax-advantaged retirement account, such as a 401(k). Unexpected expenses can put restrictions on how much debt you can pay off each month. Even smaller debts can take multiple years to pay off due to interest.
The rising cost of living and the overall fluidity of the economy could also make it harder for those on a fixed income to recover from a financial emergency.
Emergency funds in retirement
Here are some ways you can prepare for unexpected expenses during retirement if you don’t already have a substantial emergency fund.
Personal loans typically have lower interest rates than credit cards, making them a solid option if you have to go into debt to pay for an emergency expense. If you know it will take you longer than the standard 0 percent APR introductory offer that you would get with a credit card, you could save a considerable amount of money in interest by choosing a personal loan. However, make sure to never take on more debt than you know you can pay off.
An alternative “loan” option is to borrow against your 401(k) or other tax-advantaged accounts.
“Unlike a loan from a bank, this type of loan represents a temporary withdrawal from your account,” explains Sandy Blair, the director of retirement readiness at CalSTRS. “Your loan payments go back into your defined contribution account and typically the interest associated with the loan is also paid to your account.”
Make sure to meet with a financial adviser to discuss your specific plan and the possible repercussions of taking out a loan against your retirement plan.
Generally speaking, using a credit card for emergency expenses is not the best idea, especially if you aren’t positive you’ll be able to pay off the debt. However, you can take advantage of 0 percent APR offers and balance transfer credit cards if you have a solid plan for paying back the debt before the intro period ends. If a small-scale emergency expense comes up and you don’t have any emergency funds saved, a 0 percent interest or balance transfer credit card might be your best option.
Better late than never: start an emergency fund now
If you’re currently living on a fixed income, funding an emergency savings account can seem like a daunting task.
Here are a few ways you can start putting money towards an emergency fund while living on a fixed income:
- Use your pocket change. My grandfather would always empty his pockets before he got ready for bed each night. At the end of the month, he would always have a jar full of assorted coins that usually added up to at least $20. While that may seem like an inconsequential amount of money, it can add up quickly over the course of a year or two. If you primarily use a credit or debit card, apps like Acorns let you invest your digital pocket change.
- Invest in low-risk portfolios. Look into investment accounts with no minimum investment and no penalty for withdrawing funds. Then budget a certain amount of your fixed income each month to contribute to the account. Even low percent returns can help you build a decent emergency fund for a rainy day.
- Master the side hustle. While that might seem counterintuitive to retirement, a short-term side hustle can help you build up a sizable savings account. Choose an easy side hustle you can market such as ride-share driving, quilting, selling items on Etsy or Ebay or working as a freelance virtual assistant online. If you need inspiration, check out Side Hustle School.
It’s never too late to start saving for a rainy day. No matter what comes your way, emergency funds can help you maintain your financial independence throughout retirement.