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How to Prepare for Financial Setbacks in Retirement

How to make adjustments to your budget if you find yourself in a crunch

Crises during retirement can come in many forms: job loss, unexpected divorce, nonreimbursed catastrophic medical expenses, natural disaster, lawsuit, relocation, disability, care for an elderly family member or death of a family breadwinner.

Experiencing these financial setbacks in retirement can be especially overwhelming. Thoughtful planning for a potential crisis now can make the recovery period faster and less painful later.

Plan for Unanticipated Crises

Make sure you have enough saved to pay for unexpected events. If you have a retirement plan at work, like a 401(k) or 403(b), and your employer makes matching contributions, be sure to save the most you can to earn 100 percent of the matching contributions.

If you do not have an employer retirement plan, consider contributing to an Individual Retirement Account. Making risky investments in hopes of big returns is tempting, but a safer way is simply saving more.

Reduce your debt sooner rather than later. Pay down your mortgage and any consumer debt as quickly as possible. You will have more cash to deal with a crisis in the future if you are out of debt.

Stay Sharp at Work

Be flexible and stay up-to-date on the job. Learn to work well with older as well as younger colleagues. Stay current on trends in your field and make an extra effort to be the “go-to” person in your department (for technical information or problem solving, for example).

Take advantage of training offered by your employer, and seriously consider taking online or local community college courses on your own.

Assess Your Portfolio

Keep a reasonable percentage of stocks in your retirement portfolio. If you are nearing retirement, keep track of the overall amount you have invested in equities (stocks), like mutual funds or exchange-traded funds.

If you have too little in stocks — by investing too conservatively — you risk running out of money in your later years. If you have too much in stocks, you could be forced into selling when market conditions are bad.

Overcoming a Financial Crisis in Retirement

If you are already settled into your retirement and have been dealt a significant financial hardship, don’t despair. Start by making some immediate cutbacks and rebuild from there.

  • Cut back on expenses. Small changes can quickly add up over time.
  • Rent movies or borrow them from the library instead of seeing them at the movie theater.
  • Take the weekend newspaper subscription instead of the daily version, or cancel altogether and read online.
  • Change your cellphone package to a less expensive version that still works for you, and drop your landline if you can do without it.
  • Pack your lunch.
  • Make coffee at home.
  • Unplug unused electronic devices.

Making More Drastic Changes

Depending on your situation, you may have to make larger cutbacks as well:
  • Refinance your mortgage to a lower interest rate.
  • Sell a car and use public transportation; or sell a higher-value car and buy an inexpensive replacement.
  • Suspend your retirement saving contributions for a period of time.
  • Switch from more expensive whole life insurance to less expensive term life insurance.
  • Let your child pick up more of his or her college expenses. Have your child rely more on student loans and/or his or her own earnings than on your support for help with college expenses. You can always help your child pay down his or her loans after he or she is out of school if your financial situation has turned around. Even if your child has to take out more loans, remember that he or she has a lifetime to pay down the loans while you have much less time to save and prepare for retirement.
  • Downsize your home or rent a place to live. If local real estate conditions allow, consider selling your home and purchasing a less expensive replacement to reduce your debt and overall housing expenses. If you cannot afford to buy a replacement home, don’t overlook the idea of renting a less expensive home and saving the difference.

This material is provided by MyRetirementPaycheck.org, a site from the National Endowment for Financial Education that helps people explore all of their retirement decisions.

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