4th Oct 2017

Even best-laid plans may not prevent an income shock

FONT SIZE: A+ A-
income shock
Olga Galacho

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? 

Related articles:
Pooling your resources
Seniors travel insurance
Retirement income





COMMENTS

To make a comment, please register or login
Charlie
12th Oct 2017
11:37am
This is where people who want to raise the pension age based on life expectancy, get it wrong.
Its not how long you live, but how long you can stay in control of your physical performance and income in later life.
GrandmaKathleen22
12th Oct 2017
12:06pm
Your budget should include this especially if you are on a pension. For example, car expenses should include enough to cover services and repairs. Reverse mortgage is a bad idea. Private health coverage is very important especially if you are on a limited income as it is easier to manage the money you have if the health component is mostly covered by private health coverage. In the last few weeks my fund has paid out $2000 for me for day surgery and dental work. My contribution overall was only $160 which translates to $3 per week and that needs to be allowed for in the budget.
One thing that most people do not know is that there is an emergency fund to help people with their water, electricity and gas. $500 can be provided for each of those to people who struggle to pay those bills.
Research online to know what you are entitled to and for deals and general information that helps people survive financially. Knowledge is power.
Tib
12th Oct 2017
5:07pm
You can't plan for a "sudden divorce". But women aren't interested in anything that can't be turned into easy cash or shoes, house car etc. So they leave the super behind, so you buy another house and retire in comfort, and they work till their 70. Work is good for them, lol.
niemakawa
12th Oct 2017
11:52pm
Yes they need to make a larger contribution having been given so many concessions. Let them work until they are 80 and give the men a chance or better still a break.
Tib
13th Oct 2017
9:52am
I don't feel sorry for those women who clean their husbands out in the divorce then end up working as a checkout chick at 65. All I can say is " didn't work out like you thought did it" lol.
niemakawa
12th Oct 2017
11:55pm
Stop importing undesirables (third worlders, muslims in particular) to this country, then true Australians will have a chance.
Cheezil61
13th Oct 2017
12:30am
Seems author of these type of articles think we can all work & save money at same time, how unrealistic -there is always an expense/cost/bills/breakdowns (including relationship breakdowns)-life is full of bill shocks. Even if we are able to save money we are penalized or pay tax for earning any interest on it anyway! They want us to work & die, not retire & have fun, so they take everything away from hard working honest people (like Sunday penalty rates now) .. its a bit like having a baby I think- if you wait til the time is right it will never happen-lifes too short to spend all of it working (says me who will have to work forever before I can afford to even consider retirement) & it SUCKS!
evelynne
13th Oct 2017
11:27pm
If you are not wasting your money and worked all your life, you shouldn't have any problem retiring at the age of 65 and live comfortably. I worked hard, had three kids, brought them up by myself after divorcing my highly abusive husband. I was just a normal office worker, earning average wages, did work a second job though which this day is against the young people's religion (eg. not working on weekends!!!!) and now I am at the age of 67 enjoying holidays, cruises, bus tours, you name it, and I am doing it. Living life to the fullest. I am nobody special, just watched my money, invested wisely, and wasn't complaining, just saved and now ripping the rewards. If you worked, saved, looked after your money while you were young, you have no reason to complain, just for the sake of complaining. I am happy, as I said, I worked all my life, only took time off to have my kids, my kids now grown up, they are also working, never missed a day, following in my footsteps and I am sure they will be able to comfortably retire when the time comes. None of us are graduates, only went as far as finishing high school, we are just your average people. So stop complaining and start enjoying. I still watch my money eg. leaving a room and turning the lights off, putting extra jumper on in winter instead of putting the heater up, etc, etc..... There are always exceptions who have health problems, so don't write to me, I am not talking about you!! No reason to be unemployed in this country, so again don't write if you are. If you want a job, any job, you can get it if you apply yourself to it. So again don't complain to me if you haven't got it, because all the jobs are beyond you, or you don't apply yourself to it.
Cheezil61
18th Oct 2017
7:54am
That's great for you Everlynne, but everyone's circumstances are going to be different. I have been divoced twice & had another long term (8yrs) defacto whom I don't live with now but have had to pay them out each time (3 times all up, I'm 56 now) & have had to top up my mortgage every time to do it so I could keep a roof over my kids heads.
I wasn't like other women/wives who ended up keeping the house without the mortgage unfortunately!) Making the most of being alone now, no trust left any more! There are many others worse off tho & life goes on. Keen to stop working alternating 12hr shifts (inc every second weekend) as I'm too old & physical & mental health suffering from over work/burn out.
Jack
14th Oct 2017
5:50pm
Like Evelyn I also put money towards my retirement when I rejoined the workforce 34 years ago after raising my children.We have always had a budget for school fees, savings, day to day expenses, xmas etc. In the early years life was hard and we lived pay to pay, but always had savings. We built our own home which was very basic and have only in the last few years had a major upgrade to suit us in retirement. I'm 65, don't want to retire and luckily have a very supportive work environment. We can afford holidays and some luxuries, but we have worked and saved for this. Sadly this is not accessable for everyone due to their personal circumstances.


Join YOURLifeChoices, it’s free

  • Receive our daily enewsletter
  • Enter competitions
  • Comment on articles

you might also be interested in...

How to budget (in retirement)

Are you brave enough to follow Kaye Fallick’s formula to save?

Why the rich live longer

The sad truth that income and occupation control your longevity.

Is a reverse mortgage for you?

Reverse mortgages may become more popular as a means to fund retirement.

Could annuities save your retirement?

Many Australians may turn to annuities as a way to fund their retirement income.

Retirement: the risk is all yours

The risk of funding retirement income has well and truly shifted – and now it’s all yours.