Retirement is meant to be when you can relax, pursue hobbies, and enjoy the fruits of your hard work. However, the reality often includes unexpected expenses and setbacks that can strain your finances. Whether it’s due to health issues, rising costs of living, or unplanned events, dealing with such challenges requires careful planning and quick decision-making. Here are some practical ways to handle unexpected retirement expenses and setbacks.
Understand Potential Unexpected Costs in Retirement
Being aware of the expected unexpected costs in retirement can help you prepare mentally and financially.
Some expenses that may come up include:
- Healthcare costs: Even with health insurance, paying cash for treatment of significant illnesses or injuries can be expensive.
- Major home repairs: Appliances and systems can unexpectedly break down and require replacement. Roofs and outside walls also periodically need fixing.
- Major repairs: Transmissions, or even buying another car, may become necessary as vehicles age.
- Emergency travel: You may have to book last-minute trips to see sick families or handle other crises. These short-notice tickets for trains or flights often spike in price.
- Assisting loved ones: Helping children, elderly parents, or grandchildren financially during difficult times. Education costs and health expenditures of family members can arise unexpectedly.
- Market downturns: Share and mutual fund market declines directly impact investment account balances and retirement income.
7 Ways to Handle Unexpected Retirement Expenses
Here are the ways to deal with unexpected retirement expenses:
1. Build Sufficient Emergency Savings
Saving enough in secure emergency accounts can help cover unexpected costs without liquidating retirement investments at the wrong time.
Aim to have savings to cover 1-2 years of living expenses in accounts like bank savings accounts, short-term fixed deposits and liquid funds to provide a cushion. Don’t invest emergency money in stocks or equity mutual funds, which can cause a decline in value.
2. Create Contingency Plans for Key Risks
Analyse specific risks you may face based on your health, home condition, family, and financial situation.
Then, systematically plan out how you would handle major setbacks related to those key risks:
Health Risk Planning
- What types of health events with significant costs are you prone to based on family history and lifestyle?
- Where could you get treatment with limited out-of-pocket costs if diagnosed with a severe illness?
- What provisions or insurance options through companies would help?
Home Risk Planning
- How much would repairs cost if the roof, heating system, or appliances failed?
- How could those be funded?
Market Decline Planning
- If investments decline 30-40%, how would you adjust spending to avoid selling at a significant loss?
- Build enough cash reserves so investment selling isn’t required.
Family Support Planning
- If asked by children or elderly parents, could you assist with significant bills?
- Set clear boundaries on how much support you can realistically provide.
3. Optimise Insurance Coverage
Review all insurance policies before retirement to ensure optimal protection well into your retirement years.
Key insurance types to evaluate include:
- Health Insurance: After the age of 60, most retirees depend on general health plans However, these still have deductibles and co-pays, so review them carefully.
- Dental/Vision Insurance: Most health plans do not include dental or vision coverage. Consider supplemental plans or specialised vision insurance plans.
- Long-Term Care Insurance: With average elder care costs being ₹25,000 per month for home care, long-term care insurance can pay for extended elderly assistance needs.
- Life Insurance: If you still have dependents, a sufficient amount can be provided for them if you pass. Convert policies to lower-cost permanent life insurance in retirement.
- Home Insurance: With home insurance, increase the excess to decrease your monthly payments. Avoid increasing it to an excessively higher amount. Otherwise, you’ll struggle if repairs are needed after damage.
Review policy details, not just premium costs. Having the right insurance coverages can help minimise surprise outlays.
4. Develop Multiple Income Sources
Rather than depending solely on a fixed pension and EPFO withdrawals, develop additional income sources to create flexibility in your cash flows. These could help bridge gaps if unexpected dips occur in the stock market or primary income sources.
Potential retirement income ideas:
- Consulting services: If you have extensive career experience, offer consulting services to former employers/industries.
- Business ventures: Launching a small business allows you to control income generation. Consider franchise opportunities suited to retirees.
- Teaching/tutoring: Local schools, colleges, or private students may need instructors or tutors in your areas of expertise.
- Freelance work: Offer freelance services in content writing, graphic design, web development, and translation on platforms.
Having even a tiny, steady side income beyond primary retirement income sources can help cover unexpected contingencies without needing to tap heavily into savings or investments.
5. Use Home Equity Strategically
If you’ve paid off your home, the value built over time can help cover any major surprise expenses if used wisely. Reverse mortgages let you tap into that home value without selling the place. This can help pay for crises like medical treatments or home repairs.
However, high-interest charges can make these options expensive over time. Only use them judiciously if lower-cost financing options are unavailable.
6. Delay EPFO Withdrawals
One strategic move that aids retirement income and risk management is to delay withdrawing your Employees Provident Fund (EPF) corpus beyond the earliest eligibility age (currently 58 years).
Delaying EPF withdrawals by 2-3 years allows greater interest accrual, ensuring a higher value of this retirement corpus over your lifetime. The higher inflation-adjusted income for life better protects against market declines depleting assets too quickly. Delaying EPF withdrawals helps insure against many retirement income risks.
7. Use a Retirement Calculator to Map Out Your Future
A retirement calculator is a helpful tool for evaluating your financial situation, setting practical objectives, and determining your required savings. By entering your earnings, costs, and investment gains, you can create customised forecasts.
Conclusion
With planning, awareness and purposeful actions, you can handle unexpected retirement surprises while avoiding significant lifestyle impacts. The key is being mentally and logistically prepared to tackle retirement shocks smoothly.
Build sufficient emergency reserves, optimise insurance coverage, develop supplementary income sources, and be ready to deploy home equity judiciously if necessary.