Retirement is supposed to be the time when you finally relax, but for many, it’s also when financial surprises take the biggest toll.
A recent study from the Center for Retirement Research at Boston College sheds light on just how expensive these moments can be.
Researchers analyzed data from the Health and Retirement Study and the Consumption and Activities Mail Survey between 2000 and 2020. They looked at thousands of households where at least one spouse was over 65 and retired.
They then defined unexpected expenses by dollar thresholds — like out-of-pocket prescription costs over $500 or home repairs over $1,000 — to distinguish them from routine maintenance and predictable bills.
The research suggests that the typical retired household spends about 10% of its total annual income on unexpected expenses. That’s quite a chunk of change, especially when you’re living on a fixed income.
The high cost of surprises
The study found that 83% of retired households deal with at least one financial shock in any given year, and they aren’t cheap.
For households that experienced them, the average annual cost was about $7,100. The researchers broke this down into three main categories:
Family-related events: These were the most expensive, averaging $5,700.
Health issues: Unexpected medical costs averaged $4,100.
Rainy day events: Home and car repairs averaged $3,300.
While you might not face all of these every year, the data predicts an average cost of $6,000 annually over the course of retirement.
How prepared are retirees?
According to the research, the results are discouraging:
“[O]nly 58% of all older households have enough cash to cover their unexpected expenses for just a single year. An additional 16% of households could cover their expense shocks for a year if they also tapped their 401(k)/IRA assets.
However, that leaves 27% of households unable to cover just one year of unexpected expenses, even after spending all their cash and retirement assets.”
It’s tougher for vulnerable groups. The study notes that for low-income households, roughly one-third can handle unexpected expenses in a year, and they tend to have limited non-cash assets.
The statistic is much the same for Black and Hispanic households. For widowed and single female households, about half of them can handle surprise bills.
Building a better buffer
Most financial experts recommend keeping three to six months of expenses in an emergency fund. However, based on these findings, retirees might need to look at their savings differently.
The researchers suggest setting aside at least 10% of your annual income specifically for unpredictable costs. If you’re bringing in $50,000 a year, that means having $5,000 accessible for when the furnace breaks or a family member needs help.
Having ample savings can prevent you from having to sell investments at a bad time or take on high-interest debt. If your emergency fund is looking a little thin, now’s the time to start padding it so you don’t get caught off guard.
