Retirement-aged Americans living on fixed income could be at risk if financial emergency hits
USA – November 15, 2018
Retirement is the light at the end of the tunnel for many Americans in the workforce. Many work tirelessly throughout their lives 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 are reporting the lowest rate of financial improvement of any generation. According to a new study from Bankrate, 76% 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, experts claim.
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.
Emergency expenses potentially are 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.
Here are some ways you can prepare for unexpected expenses during retirement if you don’t already have a substantial emergency fund: personal loan, tax-advantaged accounts and credit cards, creditcards.com expert Madison Blancaflor explains.
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% 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% 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% interest or balance transfer credit card might be your best option.
If you’re currently living on a fixed income, funding an emergency savings account can seem like a daunting task. Currently, 46% of Americans 65 and older have less than $1,000 put away in an emergency fund, and with a retiree’s fixed income, this can leave them woefully unprepared for unexpected expenses.
Financial experts have created a guide to help retirees establish a healthy emergency fund and prepare them for any crisis in their Golden Years.