Life happens, and so do unexpected events. Unfortunately, these can also translate into unexpected expenses. Whether it’s a health issue, job loss, or a car breaking down, these incidents can quickly dent savings. But for retirees living on a fixed income, unforeseen events can quickly derail their golden years, as some might dip into savings, take on more debt, or sell investments in a down market.
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A new report from the Center for Retirement Research at Boston College found that these annual unexpected expenses represent a whopping 10% of income for the typical retired household. What’s more, 40% of households “do not have enough cash to cover even a single year, let alone their whole retirement.”
Steve Sexton, CEO of Sexton Advisory Group, said that while these findings are eye-opening, they’re not surprising.
“In my work with retirees and pre-retirees, I constantly see people plan very carefully for expected expenses, such as housing, food, and travel, but they significantly underestimate how often life throws curveballs. It confirms what many advisors see firsthand. Retirement isn’t a straight line, and too many plans assume it will be,” Sexton said.
Top unexpected expenses retirees face
The biggest unexpected expenses generally fall into three categories: healthcare, property-related, and family-related.
“Despite retirement feeling like a ride into the sunset without much unanticipated change, people routinely experience major changes they didn’t anticipate when they first retired, like downsizing sooner than planned, taking on caregiving responsibilities, or needing home modifications for accessibility,” said Jacob Sadler, CFP, founder and senior advisor at Curio Wealth.
Healthcare costs hit retirees hard
For retirees, these can include out-of-pocket expenses, prescription changes, dental work, vision care, hearing aids, and long-term care needs, and represent “the biggest wildcard in retirement,” according to Sexton.
“Health issues don’t follow a schedule, and costs can spike quickly, Sexton added.
And as of January 1, healthcare premiums increased across the board, adding further strain on the budget. Medicare increased 10%, according to MedicareRights, while Affordable Care Act plans skyrocketed due to the expiration of subsidies.
Assisted living costs are up
A Genworth survey found that assisted living community costs jumped by 10%, bringing the annual national median cost to $70,800. Meanwhile, the cost of a private room in a nursing home jumped 9% to $127,750.
Evan H. Farr, a certified elder law attorney and retirement planner at Farr Law Firm, said that while people generally plan for predictable, linear expenditures, they rarely plan for non-linear ones.
“Long-term care is not a progressive increase in cost. Long-term care is a financial cliff, and a household’s monthly expenses can jump from a couple of thousand dollars to over $10,000 very quickly. The household cannot afford the first year of unanticipated expenses,” he said.
Home and property-related costs can crush retirees
These can also make or break your retirement finances, as roof replacements, HVAC failures, and plumbing issues can quickly eat up your savings.
“Many retirees own their homes outright and assume costs will go down – but maintenance and repairs don’t retire when you do,” Sexton said.
Family-related expenses
These often go unaccounted for in the budget – helping children or grandchildren, emergency travel, or needing to step in during a family crisis comes at a cost.
“They are unexpected because they’re emotional decisions, not line items in a budget,” Sexton said.
How can retirees and pre-retirees prepare for life’s curveballs?
One way to prepare for the unexpected is to create a retirement emergency fund and automate savings as you approach retirement.
This does not just alleviate the financial shock, it also helps control stress and anxiety, whether or not there is an unexpected expense, said Bobbi Rebell, CFP, consumer finance expert at BadCredit.org.
Rebell added that it also helps to be realistic about what you can do yourself to create a backstop and what you may need to lean on family to do.
“No parent wants to ask their kids for money. That said, if you are living very lean in retirement and something unexpected happens, you may have no choice. If possible, have those conversations with your kids ahead of time so that your family ecosystem can at least try to be prepared ahead of time,” she said.
Sexton also noted that preparation starts with acknowledging that unexpected expenses are inevitable, not optional. In turn, when these expenses do occur, retirees should avoid panic-driven decisions, such as withdrawing funds from the wrong accounts, selling investments at a bad time, or taking on high-interest debt, he said.
“Having a pre-planned ‘playbook’ for emergencies allows you to respond calmly and strategically,” Sexton added.
What’s the best way to save for these unexpected expenses?
Experts agree: liquidity and access are key.
As such, Sexton said that a combination approach often works best for most people.
He said he often recommends cash or high-yield savings accounts (HYSAs) as an ideal option for immediate or short-term needs, money market accounts/funds for a balance between accessibility and yield, and conservative investment buckets for expenses that may arise in the next few years but don’t need to sit entirely in cash.
“The goal isn’t to maximize return, it’s to maximize readiness. Remember retirement success isn’t just about how much you’ve saved – it’s about how well your money can respond when life happens,” he added.
In addition, some experts recommend having a diversified investment portfolio that you can tap more aggressively during strong market years.
This allows a flexible spending approach where you can increase withdrawals when markets cooperate and pull back when they don’t, while always maintaining enough liquid reserves to avoid selling long-term investments at the worst possible time, according to Curio Wealth’s Sadler.
“The goal isn’t to hoard cash for every possible scenario; it’s to maintain the flexibility to respond to whatever actually happens, which can be easy to say but hard to do without a plan to prepare for the unexpected,” Sadler added.
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