Planning for Unexpected Changes in Retirement

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    Ashlee Walton, CFP®
    Financial Planner

    As you embark on the journey into retirement, you likely already have a plan in place. You have double checked your budget, completed a projection to confirm your portfolio can adequately provide for your needs, decided at what age you will start your Social Security benefit, and started planning new hobbies. However, it is unlikely you will get through retirement without at least a few unforeseen hurdles that could wreak havoc on your assets. So how should a retiree appropriately plan for these unexpected occurrences?

    A first step in planning for unexpected events is understanding which hurdles you are at most risk for during retirement. In the last few years, we have seen financial changes to pension plans, specifically government pensions. In 2017, the State Teachers Retirement System of Ohio reduced all future Cost of Living Adjustments (COLA) to zero (but will reevaluate again in the future). Ohio Public Employees Retirement System recently made a similar change by freezing their COLA for two years. For a retiree who planned on having these increases each year, this change results in living on less each month, or taking more distributions than planned from their portfolio. It is possible that these government systems may make future changes to remove their Medicare and health reimbursements. For private pensions, changes could also occur, especially in the event that a company files for bankruptcy.

    Another unexpected risk is becoming financially responsible for a parent or child. It is common for a parent to need home care prior to full nursing care. If they do not have funds or a Long-Term Care insurance policy, it is possible that a retiree may find themselves taking on this role as caregiver. Additionally, if a child has a life event such as a divorce or job loss, a retiree could find themselves with more long-term house guests that sometimes could include grandchildren. Becoming financially responsible for more people than planned can be a substantial change to the income needs estimated at the time of retirement.

    Numerous other risks to your financial stability include increased medical expenses, necessary home remodeling to help you remain in your home as you age, storm damage, theft, or other crime.

    A second step of planning is moving forward to make sure you are as prepared as possible. Our first suggestion is to leave some cushion in your income needs when planning for retirement and have an emergency savings outside of your portfolio. If you take the maximum amount possible each year from your portfolio, you put yourself at risk for depleting assets early if you unexpectedly need funds in the future. By taking even a little less, you can accumulate the difference and have extra dollars available to you in the future. Having an adequate emergency savings at your bank is another great way to know you do not need to raid your retirement savings in an emergency. A different way to potentially cover sudden unexpected financial needs is to have a Home Equity Line of Credit (HELOC) in place at your bank. This loan is set up with your home as collateral (sometimes referred to as a second mortgage) and can remain open until a time comes when funds are needed. This type of loan is cheap to keep open during the years you don’t need it (annual fee of approx. $100), and best for short term cash needs only since it comes with a variable interest rate. You could then pay off the loan out of your cash flow each month or over multiple tax years to save tax dollars, if the funds used to repay the loan are in a tax deferred account such as an IRA. Lastly, if the unexpected financial need is the result of becoming financially responsible for a parent or child, make sure you both understand what is needed, what you are offering, and for how long. Managing expectations and timeframes from the start can minimize the financial burden in the future.

    A third step of navigating these unplanned events is to talk to your financial planner and tax advisor as soon as a situation occurs. The sooner you start working with your professionals, the better. They can help you make informed decisions about your options and adjust your financial plan as necessary.

    As you plan for retirement, remember to plan for the unexpected by considering what hurdles you may face, and make sure you have a plan to navigate each obstacle. May you have a long and well-planned retirement!