The last post related how emergencies can put a retiree’s living standards at risk. Now the discussion turns to thinking and working through emergencies in ways that manage the risk appropriately.
If retirees pay regular living expenses from their investment portfolios, and then spend some of those investments to resolve emergencies, they put future withdrawals at risk. It’s different in middle life when living expenses are paid from salaries or wages, and savings are commonly used for emergencies.
Some Financial Approaches
One solution is to set aside a portion of a retirement portfolio for emergencies. A retiree with a $500,000 portfolio could set aside $100,000 for emergencies, using only $400,000 for ordinary living. If the withdrawal rate is 4 percent, the retiree would withdraw $16,000 annually for ordinary expenses. The $100,000 emergency fund would be left alone.
In addition, retirees have other options:
- Reduce the cost of emergencies by considering alternative solutions
- Enlarge the emergency funds by increasing income or reducing living standards
If a car breaks down or the roof leaks, a person may fix the car or leak, rather than replace them. Repairs are usually cheaper.
When a relative needs help, reducing costs will require adjustments in the relative’s thinking as well. An adult child in middle life may ask for money to help get through a divorce or through a period of unemployment. Their problems may involve house or car payments, and the best solution may be to give up the asset quickly. But the child needs to agree or it won’t happen.
Beside costs, retirees must figure out where the emergency money may come from. The situation gets hard very fast. If they simply cash in part of their investments they should cut their living expenses to help ensure the longevity of their portfolio. No one wants to go broke in their eighties.
Otherwise, retirees can look for work that will provide income, or they can start a business. These are not always pleasant alternatives, which can be a good reason to look for more support.
Because an emergency involving people can occur suddenly, it’s wise to pause and think honestly and objectively about what’s going on. Needy relatives may drink too much, use drugs, or gamble. Maybe they always carry too much debt, which prevents them from building reserve savings. There may be chronic behavioral patterns underpinning an emergency. Other family members, along with retirees, can sometimes help see such patterns.
As a unit, a family often has a deeper well of emotional and financial resources from which to draw. If one child comes in need, retired parents may involve their other children; or if a retiree’s brother or sister faces trouble, there may be other siblings and in-laws who can help.
Every family is different, so there is not one approach. But to the extent families can come together to wrestle with emergencies, they build solidarity and strength, which itself is worthy of effort.
Experience is a Strength
Emergencies with family members can end in brutal ruptures or long lasting alienations. Almost everyone who is in the last half of life has experienced or witnessed such episodes, and they are hurtful.
In family emergencies involving lasting behavioral patterns, it’s important to realize that effective resolutions must be conditioned on real honesty and potential for reform. It can take years of work to make even small increments of progress. In later life though, wisdom and patience may be in greater supply than money, and they may ultimately be more useful.