BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

6 Ways To Survive Retirement Income Shocks

Following
This article is more than 6 years old.

Nobody likes surprises when it comes to retirement planning. But life is full of bumps and we often suffer income "shocks" along the way.

You may lose your job in your prime earning years. Parents may need funds for home or assisted living care. Your children may not be able to find decent employment and move back in. You may get divorced. There are lots of ways to be financially shocked.

It's hard to predict when you're going to get slammed. Yet there are many ways to soften the blow -- and continue on your retirement path.

Income shocks can happen any time, according to a new report co-authored by Prof. Teresa Ghilarducci for the National Endowment for Financial Education.

The odds are high, the study discovered, that you'll get pinched by a major loss of income in your lifetime:

-- By the time men reach age 66-70, 96 percent had experienced at least four such episodes.

-- 61 percent of workers ages 25-70 experienced at least one episode in which they lost their earnings for a whole year.

-- 25 percent of workers age 66-70 have experienced at least four episodes in which they lost income for an entire year.

"Job loss, sickness, divorce: these are the kinds of life and economic events that derail even the most disciplined of savers," the report found.

"People want to believe `it won’t happen to me.' The truth is that almost no one is safe from these shocks, and low-income individuals are disproportionately affected."

What You Can Do To Survive A Shock

Savings is always an essential tool that can weather setbacks. And I'm not talking about contributing the minimum to your 401(k), 403(b) or other retirement accounts. You'll need to do some planning. Here are six ways to prepare:

-- Look at Long-Term Care Expenses. A decent nursing home costs about $100,000 a year, although there are alternatives from home care to assisted living that cost much less.

Although few in America save for long-term care -- there is no national program to cover these costs -- you can either buy long-term care insurance when you're younger (preferably in your 50s) or have a back-up plan. Can your family provide care? What other savings can you tap?

-- Fully Fund Your 401(k)-type plans. Although withdrawals are always taxed, your contributions are not. Better yet, get your employer's matching contribution (if offered). That's free money.

-- Fund Roth 401(k)s and Roth IRAs. These accounts tax contributions, but withdrawals are tax-free if money invested is held for at least five years and you're over age 59 1/2. They are great supplementary savings vehicles.

-- Fund HSAs. Health savings accounts are offered by employers who have high-deductible health plans. They offer triple bonuses: Contributions and withdrawals are tax-free and you can deduct from your taxes what you put in. The one catch: Withdrawals need to be applied to health-related expenses. If not, they are subject to federal income tax.

-- Always Have Liquid Emergency Savings. A rainy day fund held in an insured money market account or mutual fund is always a good idea to cover things like major repairs, insurance deductibles and out-of-pocket health expenses.

-- Consider Home Equity. When retired, you may be able to get a "reverse" mortgage that will pay you a monthly income -- if you qualify. You also may be able to get a home-equity loan. But both of these options are last resorts in the event that you don't have enough cash or retirement savings to meet your expenses.

The bottom line in beating back income shocks: Have a savings plan on multiple levels. Short-term expenses should be covered by your emergency funds. Long-term expenses can be met through your retirement savings.

See how the pieces fit together. They can add up to peace of mind.

Follow me on Twitter or LinkedInCheck out my website or some of my other work here