Get ready for an income shock

Many of us start our adult journeys full of hope and new freedom. Some of us marry, have children, eventually own our home, and then reach a point where we can look back with satisfaction at a lifetime of accomplishment.

Unfortunately, we cannot look into the future as clearly as we can scrutinise the past, let alone predict if the years to come will hold a nasty retirement income shock.

Even the best-laid plans may not be able to protect you from an unforeseen episode that robs you of financial security.

Scenarios we may not anticipate include a sudden divorce, a lawsuit, the death of a loved one, a natural disaster, a debilitating illness or accident that leaves you permanently disabled, or even a major theft that demolishes your nest egg. Any one of these tragedies will deliver a shock to your retirement income and may leave you with no way of paying big bills.

And if you think this won’t happen to you, think again. A US report, Income shocks and life events: Why retirement savings fall short, asserts that “the odds are high that you’ll get pinched by a major loss of income in your lifetime’’. The chances that you will suffer bad luck of this sort are greater if you are a low-income individual.

The study by the National Endowment for Financial Education found that:

  • By the time men reach 66 to 70 years of age, 96 per cent have experienced at least four income shocks

    • 61 per cent of workers aged 25 to 70 experienced at least one episode in which they lost their earnings for a whole year
    • 25 per cent of workers aged 66 to 70 experienced at least four episodes in which they lost income for an entire year.

    

The authors emphasise that the average older person is unlikely to have enough savings to deal with a catastrophic life event. They recommend that everyone should plan for a financial disaster so that if and when it happens you can avoid becoming destitute.

Some strategies you can discuss with your financial planner include:

  • Make deposits in two savings accounts. Use one for daily living expenses and do not withdraw from the second one. The second account should be one that attracts a higher rate of interest, such as a term deposit. The effect of compounding interest on the second account will add to the funds stashed away for an emergency.
  • If you receive an unexpected large expense, such as a medical or hospital bill, your superannuation fund may allow you to make a lump sum withdrawal
  • Consider using the equity in your home as a reverse mortgage
  • Some banks will extend personal loans to retirees as long as they can prove they have regular income, such as from a superannuation fund, annuity or Age Pension
  • It’s never too late to take out private health insurance. Some companies tailor their products to seniors and the Government chips in with extra rebates if you have a Seniors Health Care Card.
  • The Department of Social Security can provide emergency relief if you cannot afford basic necessities and in some circumstances the Department of Human Services may be able to offer a low-interest rate loan.

Have your finances ever hit rock bottom? What strategies do you use to avoid a financial shock? 

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Retirement income

Written by Olga Galacho

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