Retirees face steady stream of financial shocks, with many short on cash buffers

Retired clients may be budgeting too tightly around “normal” expenses and not enough around the steady drip of financial shocks that hit almost every year, new research suggests.

A recent Center for Retirement Research brief, backed by AARP, finds that nearly all retired households encounter at least one unexpected bill in a typical year, and many lack the liquid savings to absorb those costs without tapping investment accounts.

The analysis uses two decades of data from the Health and Retirement Study and its associated consumption survey, focusing on households where at least one spouse is 65 or older and receiving Social Security.

The authors group shocks into three broad buckets:

• Large car and home repairs and other “rainy day” costs;
• Family events such as transfers to adult children or the financial fallout from a death or divorce; and
• Health-related outlays, including big out-of-pocket bills, dental and prescription costs, and long-term care expenses.

According to the brief, “in a given year, 83 percent of all households will face at least one type of spending shock.”

Those shocks are common across the retiree population but show up differently by income. Overall, 60% of households see a sizable car or home repair or other rainy day bill in a given year, 29% face a family-related shock, and 58% confront an unexpected health expense. Higher-income retirees are more likely to spend when needs arise, especially on home and car issues, while lower-income households are more likely to put off or avoid maintenance totally.

When a shock does hit, it can be more than just a setback. Among households that experience at least one unexpected expense, total annual costs across all categories average about $7,100. Smoothed out over a full retirement, the predicted annual cost of unexpected expenses is roughly $6,000 per household.

Health care is the single largest component of those projected costs and varies less by income than other categories, a sign that retirees are less able or willing to put off health spending. For the median household, the researchers estimate that surprise expenses amount to about one-tenth of yearly income.

As the brief puts it, “the typical retired household is predicted to spend 10 percent of annual income on unexpected expenses,” implying that retirees “should set aside at least 10 percent of their annual income as emergency savings.”

For advisors, the more pressing story is how few clients actually clear that bar in cash. Just 58% of older households have enough liquid savings to cover one average year of predicted shocks. Another 16% could manage a year’s worth only by drawing down 401(k) and IRA balances, which risks undermining long-term withdrawal plans. That leaves 27% unable to cover one year of typical unexpected spending even if they exhaust both cash and retirement accounts.

The numbers are even starker for vulnerable groups. Only about a third of households with less than $50,000 in income have sufficient cash to handle a year of shocks. A similar story plays out for Black and Hispanic households, and cash coverage falls to roughly half among single women and widowed retirees. Concerningly, these same groups also tend to have fewer non-cash assets to fall back on.

The brief warns that being able to handle one average year is “a very low bar for gauging the ability to weather emergency expenses,” because retirees confront some level of surprise spending in virtually every year and generally have limited capacity to rebuild savings by working longer.

For RIAs and other advisors, the research bolsters the case for building multi-year emergency cushions into decumulation plans, not just a single one-year buffer. It also aligns with policy ideas the authors highlight, including encouraging later Social Security claiming, expanding affordable long-term care coverage, promoting health savings strategies, and providing more structured guidance on drawdown tactics that can accommodate a recurring stream of shocks over a 25-year retirement.