Planning for the unexpected in retirement

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cinsea
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Planning for the unexpected in retirement

Post by cinsea » Tue Feb 13, 2018 5:32 pm

I am trying to work out how much money I should have saved for retirement. I have a pretty good grip on it overall--I know my current spending and budget, and assuming a 4% draw rate, I know how much money I should have saved in order to have the same after-tax income in retirement.

But one thing perplexes me--planning for the unexpected/emergencies.

What I do today, while working, is just draw on the bond portion of my portfolio if an emergency happens, and then repay it later with additional savings. Since I"m still working there's time to catch up if there's an unexpected expense--I could delay retiring a little if I face a large unexpected home repair bill, or a period of unemployment, or some other unexpected expense.

But once I'm retired there's no catching up -- I'm just drawing down whatever I have. Clearly, I should allow some extra savings beyond my regular monthly budget to handle the unexpected.

But how much? Is there some guideline? Rule of thumb? How do other people think about this?

My current assumption is I should save about 10% more for retirement than I need to fund my monthly budget. But I just made that up--I have no data or reason to believe that 5% o 20% wouldn't be better guidelines.

Any thoughts?

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Pajamas
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Re: Planning for the unexpected in retirement

Post by Pajamas » Tue Feb 13, 2018 5:34 pm

It is a lot easier to have to think of ways to spend what turns out to be too much money than to have to figure out ways to conserve what is not enough money.

livesoft
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Re: Planning for the unexpected in retirement

Post by livesoft » Tue Feb 13, 2018 5:40 pm

There is no magic here. Either save more or spend less or in "retirement' get a job.

See for example: https://earlyretirementnow.com/2018/02/ ... exibility/

Others will point out that in retirement there are discretionary expenses that one doesn't have to spend. Presumably, your current spending habits have a few of those. Examples are: Going out to eat. Going on vacations. Charitable contributions. And so on.
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Watty
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Re: Planning for the unexpected in retirement

Post by Watty » Tue Feb 13, 2018 6:04 pm

cinsea wrote:
Tue Feb 13, 2018 5:32 pm
But one thing perplexes me--planning for the unexpected/emergencies.
One thing I do is to budget for unpredictable expense that you have a pretty good idea that something like that will happen, but you just don't know when.

For example you can pretty well bet that sooner or later you will have to pay for things like expensive dental bills, big home repairs, big car repairs, replacing a car sooner than expected, etc but you don't know when they will happen so from that point of view true emergencies should be relatively rare.

cadreamer2015
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Re: Planning for the unexpected in retirement

Post by cadreamer2015 » Tue Feb 13, 2018 6:27 pm

Most things that are truly unexpected emergencies should be handled by insurance. Needing a new roof could be an emergency if the water is pouring in the ceiling, but should not be unexpected. Same with needing a new car because the old car suddenly quits. These are things which you should expect to happen some time or another, and you build in to your spending plan the cost of a new roof every X years, a new car every Y years.

Getting hit by a truck should be covered by insurance. Needing a crown or new glasses may be unexpected, but should also be built in to your retirement budget on an average basis, or you can purchase dental and vision insurance.

From my point of view the major hard-to-predict major expense is Long-term care. You can purchase Long-term care insurance, but it is expensive.

As others have written, one way to build unexpected higher expenses into your retirement budget is to have some room for extras which can be cut back or eliminated, like dining out, vacations and charitable giving.
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carolinaman
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Re: Planning for the unexpected in retirement

Post by carolinaman » Wed Feb 14, 2018 8:02 am

You need a margin of safety for the unplanned issues that arise in retirement. IMO, 10% is bare minimum. A 15% to 20% cushion would be better. I have been retired 7 years and have encountered some major expenses like replacing HVAC and ductwork ($10k), tree trimming and removal ($8k), water/drainage issues, expensive dental work, hearing aids, etc. We made the decision to stay in our 44 year old home and this resulted in some expensive maintenance and repairs. We have replaced one car and will need to replace another in the next couple of years.

You should build into your budget replacement of autos, even if you drive them a very long time. Similarly for home maintenance.

Health care is a wild card. Once you are on medicare, you will have good coverage, especially if you have a medicare supplement and prescription coverage. However, even so a major illness and expensive uninsured drugs can be devastating on your finances. We opted to self insure for long term care. Whether this was a good decision remains to be seen.

There will always be uncertainty for retirement finances, but anticipating things that have a reasonable probability of occurring and how you would deal with them will help you plan for your retirement.

gotester2000
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Re: Planning for the unexpected in retirement

Post by gotester2000 » Wed Feb 14, 2018 8:21 am

Watty wrote:
Tue Feb 13, 2018 6:04 pm
cinsea wrote:
Tue Feb 13, 2018 5:32 pm
But one thing perplexes me--planning for the unexpected/emergencies.
One thing I do is to budget for unpredictable expense that you have a pretty good idea that something like that will happen, but you just don't know when.

For example you can pretty well bet that sooner or later you will have to pay for things like expensive dental bills, big home repairs, big car repairs, replacing a car sooner than expected, etc but you don't know when they will happen so from that point of view true emergencies should be relatively rare.
This is called as:-

1. Known unknown - eg. Healthcare costs

2. Unknown unknown - eg. War

Allocate some percentage of net worth in both cases.
My magic number is 30% - or add 30% buffer to your yearly expenses and calculate your retirement figure using these calculations.
Plans are meant to be revised periodically.

dbr
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Re: Planning for the unexpected in retirement

Post by dbr » Wed Feb 14, 2018 10:17 am

I plan a budget that has 25% contingency for underestimation and is also tested by imagining what would happen if there were an unexpected drain of $100,000 at some arbitrary point, even though that seems unlikely.

The comment about insurance has some validity, but there are lots of costs that are not insurable. So far over the last several years we have actually absorbed around $100,000 in uninsurable expenses. While it is true we could have simply not shouldered those burdens, that is not what we did.

TN_Boy
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Re: Planning for the unexpected in retirement

Post by TN_Boy » Wed Feb 14, 2018 11:13 am

cinsea wrote:
Tue Feb 13, 2018 5:32 pm
I am trying to work out how much money I should have saved for retirement. I have a pretty good grip on it overall--I know my current spending and budget, and assuming a 4% draw rate, I know how much money I should have saved in order to have the same after-tax income in retirement.

But one thing perplexes me--planning for the unexpected/emergencies.

What I do today, while working, is just draw on the bond portion of my portfolio if an emergency happens, and then repay it later with additional savings. Since I"m still working there's time to catch up if there's an unexpected expense--I could delay retiring a little if I face a large unexpected home repair bill, or a period of unemployment, or some other unexpected expense.

But once I'm retired there's no catching up -- I'm just drawing down whatever I have. Clearly, I should allow some extra savings beyond my regular monthly budget to handle the unexpected.

But how much? Is there some guideline? Rule of thumb? How do other people think about this?

My current assumption is I should save about 10% more for retirement than I need to fund my monthly budget. But I just made that up--I have no data or reason to believe that 5% o 20% wouldn't be better guidelines.

Any thoughts?
We looked back almost 10 years and computed our average expenses. This time span included a medium size home remodeling, at least two car purchases (largely paid for in cash), HVAC replacement, and some very nice vacations. I view the 5 figure HVAC and remodeling expenses as close enough to emergencies to being all I need for estimations for the "unexpected."

When you look that far back at your expenses, what do you see?

I like dbr's idea of assuming a single massive 100k expense might be needed, but we could handle that.

ER2023
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Re: Planning for the unexpected in retirement

Post by ER2023 » Wed Feb 14, 2018 11:54 am

Something that recently came up for us is MIL nursing home expenses. Her social security and money from the sale of her home was able to cover her in the nursing home for a couple years. The money ran out and now it's just SS. With the recent move into a dementia unit, we now have to come up with an extra $1400/month to cover this. Definitely not planned, so just something to think about. Would love to retire somewhat early, but fearful of these types of unexpected events.

Shallowpockets
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Re: Planning for the unexpected in retirement

Post by Shallowpockets » Wed Feb 14, 2018 12:31 pm

Your best plan is to save as much as you can. You can't save anymore than you can. The plan is to have as much money as possible to be ready for the unexpected.
Suppose you had an unexpected. If you saved as much as you could have then that is all you can do.
The only "more" you could do is to buy as much insurance for everything you could imagine at the maximum coverage.

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Watty
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Re: Planning for the unexpected in retirement

Post by Watty » Wed Feb 14, 2018 2:53 pm

Even things like contingencies for a nursing home can be planned for.

My gut feel is that the risk of poor investing returns and inflation, especially rarely in retirement dwarfs the other unexpected risks that you might think of.

Most people also plan for more than the basics in and could cut back their retirement spending by 10 or 20 percent and not have any real hardship.

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Sheepdog
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Re: Planning for the unexpected in retirement

Post by Sheepdog » Wed Feb 14, 2018 2:58 pm

Hope you won't mind my repeating what I have stated often times.

I will give you my history in retirement which may give you some ideas on managing your retirement funds. I have been retired for 19 years, now 84. To determine the minimum I should have at the beginning of retirement was to take my average spending over 4 years close to the commencement, a period when I was taking nice vacations, buying an auto, etc. like I expected to spend in retirement, subtracted from that my expected Social Security (no pension amount was to be added) and divided that figure by 0.04 (4%) That was how much I thought I should have. (I did have a few percent more when I retired in 1998).

Needs are not constant in retirement. You must plan for such things as required large home maintenance items (major remodeling, new roof, driveway replacement, etc.)...automobile replacements in certain years......major unplanned medical expenses including large hearing or dental expenses which will popup unexpectedly. Will whatever percentage withdrawal method you use take care of those? When they occur, will they derail your withdrawal plan resulting in financial difficulties in your late retirement? No plan is perfect, but you should realize that you will have to take them in your considerations. If you have excess income, then you can relax somewhat. If you must maintain a tight retirement income and spending plan to maintain your lifestyle for a long life span (100?) like I do, then you should have a plan for the unplanned.

My stock allocation of 100 minus my age (or age in bonds and cash, if you prefer) has worked fine for me. My average return in these 19 years was 6.7% with that changing stock allocation. I was at 57% stock at age 65 and then I started the gradual reduction. At age 77 (2010) I reached 23% stock where it has remained. This may be too low for some, I realize, but I didn't feel I needed more....and I didn't.

This plan has worked for me. It requires an annual review of the annual spending and future needs to control withdrawals. In short, I planned for an average annual withdrawal percentage, not a specific set annual withdrawal percentage. The withdrawals will be variable year to year, low in some years in order to pay for the large expenses in others, yet keep within the average of multiple years. It requires me to limit spending in down market years, but I have never wanted.

I live off of savings and SS only. My goal was a withdrawal of 4.5% a year, not adjusted for inflation (have more, I can spend more. Have less, I need to try to spend less.) That has worked for my lifestyle....good living, new autos for my wife and me on regular basis, nice vacations when income is good, enjoy sports and entertainment, etc. every year. Actual annual withdrawals have been variable to meet spending needs and wants. They have ranged from 3.11% to as high as 7.52%, but the average withdrawal was 4.56%. My savings balance today is higher than it as at retirement. I won't run out.
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zengolf2011
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Re: Planning for the unexpected in retirement

Post by zengolf2011 » Wed Feb 14, 2018 8:52 pm

OP, I think there is no magic number because the unexpected is, well, unexpected. But your most powerful risk management tools are those areas over which you have the most control. You cannot control the stock market. You cannot control the bond market. You can influence, but not totally control, your health. You have complete control over your asset allocation. You have a lot of control over your expenses. You have some control over your savings rate. Asset allocation, expense management, savings rate, and adaptability, are your most potent risk management tools.

cinsea
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Re: Planning for the unexpected in retirement

Post by cinsea » Thu Feb 15, 2018 3:28 pm

Thanks for the feedback everyone, I am starting to formulate a way to model this.

Some people said I should just save as much as possible -- which would mean cutting back on expenses today, in order to have more in retirement. I want to find the right balance where I can spend as much as possible today, and still enjoy that same level of spending in retirement. So that means I only want to cut my budget today if that would be necessary in order to have the same spending then. Therefore I want to have a good way of modelling how much to set aside for emergencies and the unexpected.

People here identified two broad categories of risk that I should be prepared for:
1. Things that I know will happen, but not when
2. Stock market risk

The first one is modeled well by what somebody called a "freedom account", where you add up all the big unusual expenses you've faced and average it into your budget. I have created three of these: Savings towards a car purchase, savings towards travel, and a fund to cover other big expenses--medical, repairs, relocation. Looking back over the last 10 years I added up all the times I faced these expenses and divided by ten to come up with a number that I should be setting aside every month in anticipation of these costs. So far so good!

Market risk has a different nature. How much extra should you have in your portfolio to be able to handle a decline? So I did this--I searched and found all the times in the last 100 years that the market has declined by more than 15 percent, and then divided that by 100. I'm sure my calculation could be more accurate, you could quibble as to whether I should have included every correction over 15 percent, excluded some crashes where the recovery was fairly quick. Sure. But overall it's a useful way to think -- these were the times where your draw down might eat significantly into capital as a result of a recent downturn in the market.

Here is my list:

2015 -16%
2008 -53%
2001 -38%
1998 -20%
1990 -18%
1987 -23%
1980 -16%
1973 -45%
1970 -30%
1962 -27%
1949 -19%
1945 -19%
1929 -89%

If I add that up and divide by 100 it seems to me you should sock away about 4% of your annual budget in anticipation of having to get through a market downturn without significantly impacting your savings. I know, not very scientific -- but better than a finger in the air.

So my model for what I need in retirement is therefore this:

Savings required = 25 * (current-spending + freedom-fund) * 1.04

(The 25x is the number to achieve a 4% draw rate)

Thoughts?

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