Retirees across all income levels need to set aside 10 per cent of their income in a given year for emergency expenses, according to a recent study.ozgurcankaya/iStockPhoto / Getty Images
A single fall, stroke, or health diagnosis can thrust Canadian seniors and their families into financial distress.
It’s a reality that senior care advisers such as Esther Goldstein see all too often. She heads the Lifestyles 55+ Network that supports Canadian seniors and their families in advanced care planning, and warns of how the costs of care can far outpace seniors’ fixed incomes and retirement savings. “Most people don’t plan ahead,” she said. “Until they’re pushed to the wall and have a crisis.”
A recent study by the Center for Retirement Research at Boston College found that only 58 per cent of U.S. seniors have enough cash to cover for emergency expenses for one year. Such shocks can range from car and home repairs to major events including the death of a spouse or moving to a care home. One in five Americans falls short even after including retirement savings, according to the study.
“There’s been a lot of studies on emergency savings for working people, but it’s been very limited for retirees,” said Anqi Chen, economist and co-author of the study, in an interview. “These financial shocks don’t go away in retirement.”
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In fact, retirees can find themselves more vulnerable when unexpected bills hit since they’re no longer working and earning income. Her research estimates that retirees – across all income levels – need 10 per cent of their income set aside for emergency expenses in a given year.
Generally, whether you’re working or retired, many advisers suggest setting aside three to six months worth of living expenses in case of a job loss, or surprise expenses such as home repairs or illness.
“Liquidity really matters,” Ms. Chen said. While higher net-worth seniors may be equipped to absorb financial shocks, “low-income households shouldn’t need to turn towards using their credit cards,” she said.
For financial planners, the focus is helping retirees prepare for worst-case scenarios without letting fear overshadow their best years.
“Many clients in their 50s and 60s hesitate to spend, worried they may eventually need long-term care,” said Adam Bornn, certified financial planner from Parallel Wealth based in Langley, B.C. “But we don’t want to throw away your good years of retirement for a very small ‘what if’ percentage of something happening down the road.”
In a perfect world, $150,000 to $200,000 in assets (in today’s dollars) should help buffer against late-life care costs, according to Mr. Bornn. This may be a manageable goal if you own a home, “but if you rent, you have to build your plan a little bit differently, there’s no doubt about that,” he said.
At the very least, Ms. Goldstein advises seniors to prepare powers of attorney and clearly communicate their care preferences well before a health emergency.
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The lack of planning leaves many seniors with limited options as care costs can be steep. Private in-home care can cost $30 to $50 an hour, while public long-term care typically ranges from $2,000 to $3,000 per month, with waiting lists that can stretch months or even years, according to Ms. Goldstein. Private long-term care, she said, can reach $10,000 a month.
“Our private system has compensated for the lack of beds in the public system, but the problem is, you need money,” she said.
When faced with so many unknowns, people often don’t know what to ask their financial planner when planning their retirement. Mr. Bornn, whose firm specializes in retirement planning, asks clients to consider questions like “Do you have aging parents or younger kids that could rely on you financially in the first 10 to 15 years of your retirement?” and “If you have to get in-home care or go to a care facility, what do you see that looking like?”
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For those with public care as their only option, Mr. Bornn recommends drawing down their RRSPs before their 80s. “If you can create a world where your taxable income is low, you’re going to pay less for your care home,” he said. “[The public system] looks at income, not assets.”
Rainy-day expenses can be managed through a tax-free savings account (TFSA). “If you need a little bit more money for emergencies, that’s where you pull it from,” he said. “And if you don’t need as much, that’s where you leave it.”
But beyond choosing the right draw-down strategies, Ms. Goldstein stresses that preplanning is about maintaining control in retirement and easing the burden on family. “You can make it easy, or you can make it hard. Somebody said to me once, ‘None of us are getting out of here alive, it’s just a matter of how we go.’”
