Life events like a natural disaster, health crisis or expensive home repair have one factor in common: They come when you least expect them. Most Americans (55 percent) worry about what they would do when faced with a financial emergency, according to the 2018 Northwestern Mutual Planning & Progress Study. And stress levels only increase if you are on a fixed income. “Unexpected and uncovered emergencies can literally ruin a retirement plan,” says Nahum Daniels, a wealth advisor in Stamford, Connecticut.
If you’re retired and facing a financial emergency, here are some of the best approaches to gather funds, cover the costs and move forward without going into debt.
Tap easy-to-access funds. If you have an emergency fund, now is the time to use it. When gathering additional sources of cash, check for accounts that are simple to access and won’t have a hefty tax impact. “If you have money in a savings account at the bank, start withdrawing from that before you tap your IRA,” Daniels says.
[See: 10 Costs You Can Eliminate in Retirement.]
Remove extras from your budget. Check to see if certain activities, like eating out or travel, can be reduced in the next few months to cover the cost of a crisis. “Is there a monthly surplus of cash flow? That’s where you can find some money,” says Elisabeth Dawson, founder and CEO of Copia Wealth Management and Insurance Services in San Diego.
Examine your bills. Make a list of your ongoing necessary expenses, such as car insurance and your cellphone bill. If you haven’t negotiated or requested a lower rate in the last year, take some time to reach out. “Call every company you owe and ask if you’re getting the best deal and rate,” Dawson says. “Oftentimes, you can drop your expenses and free up funds to pay for the emergency.”
Sell a big-ticket item. You might be able to bring in a significant amount of cash by putting a price tag on a large asset you no longer need. Start by identifying belongings you don’t use as often as you did in the past. “Many retired couples have two cars, but both cars are almost never in use at the same time,” says Timothy Wiedman, a retired associate professor of management and human resources at Doane University. If one car sits in the garage week after week, try selling it. You’ll get cash to cover a pricey expense and will save on maintenance and insurance costs in the future.
Family vacation vehicles, like an RV or camper, could sell for thousands of dollars. “Another often unused asset that’s costly to maintain is a power boat that was regularly used when the kids were young, but now just sits on its trailer in the garage and gathers dust,” Wiedman says.
[See: The Best Places to Retire in 2018.]
Think about relocating. If you were planning to downsize in the next few years, weigh the pros and cons of moving now to cover an unplanned expense. You could raise the money you need by relocating to a smaller home in a less expensive neighborhood. You’ll have fewer expenses going forward in a spot with low property taxes or living costs.
Look at life insurance. If you’ve had a whole life insurance policy for decades, you might be able to gather funds from it. “Retirees often had such policies when their children were much younger,” Wiedman says. “But once all the kids have good jobs and families of their own, it may make sense to cash in that policy.” Think about replacing the old policy with term insurance, which is usually cheaper and could be used to simply cover final expenses.
Understand tax implications. If you decide to pull funds from a retirement account, such as a traditional IRA, be aware that what you take out will be subject to taxes. Before making any decisions, sit down with an advisor to form a strategy. For example, if you have a brokerage account with a holding that is held at a loss, you might be able to liquidate the holding and free up the funds. Since it was held at a loss, you would benefit from having a tax write-off. “Also look into liquidating several holdings so that when you net the tax impact together, the gains offset the losses and there is little to no tax impact,” says Megan Jones, president and founder of Jones Advisory Group in Topeka, Kansas. Another way to reduce taxes when taking distributions from a retirement fund involves spreading the withdrawals out over two tax years. You might take half of the money out on December 28, for instance, and the remainder on January 2.
[See: How to Pay Less Taxes on Retirement Account Withdrawals.]
Check for 0 percent APR opportunities. Many credit cards offer an initial interest-free period. During this time, which often lasts for six months or a year, you won’t have to pay any interest on the card’s balance. If you qualify, you might be able to use the card to cover the expense. Then set up a plan to pay it off as quickly as possible. Stick to a payment schedule to wipe out the balance before the interest-free period ends. “The trick is to make sure you pay off the balance before the deadline so that you’re not charged high interest rates,” Dawson says.
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How to Deal With a Financial Emergency in Retirement originally appeared on usnews.com
