Worried About Surprise Retirement Expenses? So Am I. Here's My Plan

I ran into a person I know from the neighborhood last week who's fairly new to retirement, and we got to chatting about life. I explained that I was deep in the throes of sports season and busy as ever shuttling my kids to games and practices. She shared that while things were generally going well, her house was, as she put it, "starting to fall apart."

She then proceeded to discuss the almost $40,000 in repairs she's looking at this year. And I couldn't help but wonder how she was going to manage it all.

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Granted, I don't know her financial situation. I don't think she's in a place where she needs to pinch pennies, but I also don't think she has a million-dollar nest egg to fall back on.

It got me thinking about surprise expenses in retirement. I'm no stranger to costly home repairs, car issues, or medical bills. But I've never had to cope with them in the absence of a paycheck because, well, I'm not retired.

Thankfully, though, I do have a plan for covering surprise retirement expenses. And I happen to think everyone should.

Careful budgeting isn't enough

It's extremely important for every retiree to have a budget. When you're at the stage of life when you're spending your savings, you need to track where your money is going.

But certain expenses just can't be budgeted for. You can't budget for a roof repair or HVAC replacement you didn't know you needed. You can't budget for a sudden injury that puts you in the hospital and leaves you with $3,000 in medical bills between your stay and rehab.

That's why it's important to have a backup plan for surprise retirement expenses. And mine is to continue to maintain an emergency fund in a dedicated account.

Right now, I have a few separate accounts where I'm saving for various goals. My college account is where I have money for my kids' education. My 401(k) plan is where my retirement nest egg sits. My brokerage account is my flex account, where I'm hoping to use the money for retirement, but I can also dip into it to pay for college if need be.

Then I have two different savings accounts. One is for fun goals, like vacations or home improvements. The other is a strict emergency fund meant to cover unplanned expenses.

In retirement, I plan to maintain that separate emergency fund and only touch it for genuine emergencies. And to be clear, that's in addition to cash I intend to keep on hand to ride out a stock market downturn.

Retirees are often advised to have one to two years' worth of cash in case there's a prolonged market slump. I plan to keep an emergency fund that's separate from that 12 to 24 months of cash so that I'm covered for large expenses that arise out of the blue.

You can set up some protection

Certain surprise retirement expenses can't be avoided or planned for. But in some cases, you can take steps to minimize the financial blow.

If you sign up for original Medicare, for example, you could buy Medigap insurance to help pick up the tab for large costs you incur. If you buy long-term care insurance, it could help defray the often astronomical cost of a home health aide or assisted living.

Either way, it's important to have a plan for unanticipated bills later in life. And the time to start making that plan is while you're still working, so you can save accordingly.

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