News flash: Just like everything else in life, retirement doesn’t always go as planned. Even if you diligently saved for your retirement years, unexpected emergencies—from a medical event to a natural disaster or even a stock market downturn—can throw a wrench in your plans, and your budget.
Without income to rebuild after a financial setback, the temptation is to handle such emergencies in a way that makes them go away ASAP. Trouble is, that can impact your financial security going forward. “When you’re in [the midst of] an emergency, it’s easy to panic and just do whatever you can do fix it now,” says Steve Vernon, a research scholar at the Stanford Center on Longevity. “But it’s important to take a deep breath and think through your options. You don’t want to do something that you later realize wasn’t the best course of action.”
Here’s a look at some of your options, on their own or in combination, for covering unexpected expenses in retirement.
Fall into your safety net
This is why you have an emergency fund. If you’re able to cover your unexpected expense by pulling money out of your emergency fund, ideally cash that’s in a liquid account such as a high-yield savings account (rather than the stock market), now’s the time to do it.
You may also have other financial safety nets that can help with your emergency expenses. Home insurance, for example, might be able to offset the expenses associated with events like a fire or frozen pipe, and disability or long-term care insurance might kick in if a medical event requires sustained medical treatment.
What to think about: Once you’ve drawn down your emergency fund, you should have a plan for building it back up again, so that it’s available for you again in the future. That might require taking a close look at your expenses in the short-term in order to free up cash to set aside for the next emergency. And, if you haven’t evaluated your need for long-term care or disability coverage, isn’t it about time?
Change your lifestyle
Making some big changes, such as downsizing to a smaller home or an area with a cheaper cost of living, is one way to stretch your budget further in retirement. Another move that’s smarter in more ways than one is to find additional sources of income, such as a part-time job or consulting work.
What to think about: While these types of changes can be a long-term solution for finding more cash, they may not help in a situation in which you need immediate cash for an emergency expense. You might also consider smaller changes to your budget, such as cutting back on premium cable channels, going out to eat less, or eliminating subscriptions for services that you don’t use.
Draw down your retirement accounts
As long as you’re over age 59 ½, you won’t pay a penalty for taking money out of retirement accounts such as a 401(k) or an IRA, and you’ll never owe a penalty for taking cash out of non-retirement investment accounts.1
What to think about: Even if you don’t owe an early withdrawal penalty, you will have to pay taxes on any money from non-Roth retirement accounts, or investments that have gained in value. Plus, if the withdrawals are coming from your retirement nest egg, you’re going to have less money to live on each year going forward. “Once you’ve spent the money in your retirement accounts it’s gone,” says Emily Brandon, author or Pensionless: The 10-Step Solution for a Stress-Free Retirement. “It leaves you really dependent on Social Security and any other sources of money that you have coming in.”
Tap into your home equity
The largest existing asset for many retirees is their home. For four in 10 households age 65-69, the value of their home equity is greater than the value of their financial assets, according to the Center for Retirement Research at Boston College.2 You may be able to tap into the value of your property via a home equity loan or line of credit, or even a reverse mortgage.
What to think about:
You need to have home equity in order to borrow against it, so this method is best for folks who’ve lived in their home for a long time without refinancing. It can be difficult to qualify for a home equity loan or line of credit if you don’t have a current income. Plus, you’ll owe interest on anything that you borrow, although you typically have years before you have to start paying back the principle. Reverse mortgages can be a good option, if you’re planning to remain in your home for the long term. They allow you to draw a lump sum or monthly payment against your home’s equity, that you don’t need to pay back as long as you live in the home. But reverse mortgages typically carry high fees and they can significantly erode your home equity leaving you with little or none left if you do need to move later. In other words, tread carefully.
Consider a credit card with a 0% interest rate
You may be able to open a new credit card that allows you to spend money without paying interest on it for up 11 months.3
What to think about: Look for a card that has a high credit limit and no annual fee, and keep in mind that you’ll need good credit in order to qualify for these offers. If you do choose to use a credit card for your emergency, you should have a plan to pay back the amount you’ve borrowed before the promotional period expires. “You have to think of credit cards as a short-term solution,” says Jim Blankenship, author of author of Social Security Owner’s Manual. “You don’t want to over extend yourself and go into a position where you cause damage to your credit rating or you’re paying extremely high interest rates.”
With Beth Braverman
1 “IRA and 401(k) Withdrawal Rules and Penalties Understanding Qualified Distributions” the balance, April 2020 https://www.thebalance.com/how-to-withdraw-money-from-a-401-k-or-ira-2894212
2 “Is home equity an underutilized retirement asset?” Center for Retirement Research at Boston College, March 2017 http://crr.bc.edu/wp-content/uploads/2017/02/IB_17-6.pdf
3 “0 APR credit cards” WalletHub 2020 https://wallethub.com/credit-cards/0-apr/