A brief written in early January by Marita Rao and Anqi Chen examined the ways financial shocks affect retirees differently than those in households where people are still working. For example, the greatest financial shock for those in the latter is the loss of a job. To protect themselves, workers are often encouraged to put aside three to six months of income.

But retiree households find themselves more vulnerable when it comes to health and family issues. The ways they handle surprise expenses here will determine how much they have left over to allocate to investments and annuities. It’ s also important for them to know ahead of time how much they will be able to rely on family for long-term care, and whether they need to tap into their home equity.

“ One challenge in determining how much to set aside for unexpected expenses is that the costs can vary dramatically,” the Boston College authors said. For instance, in one survey the authors cited, 25 % of respondents reported spending less than $ 800 on unexpected expenses— but another 25 % re-

A typical retiree household will have unexpected expenses totaling about 10 % of income annually, but 40 % of households do not have the cash to cover a single year, let alone all years through retirement, according to the Center for Retirement Research at Boston College. ported spending at least $ 6,000. The median expense was $ 2,000.

“ One reason for the large variation is that households have a degree of flexibility when deciding how to address expense shocks.” For instance, households of varying wealth will have to use discretion on how much they can spend on things like replacement refrigerators or new tires.

To estimate what expenses can be considered unexpected and to predict the level of expense and a retiree’ s ability to handle it out of income, the researchers pulled data from the 2000-2020 Health and Retirement Study, and the accompanying 2001-2019 Consumption and Activities Mail Survey. Both were conducted by the University of Michigan.

Unexpected expenses were divided into three categories: One was rainy-day items, which included greater-than-budgeted expenses for car and home maintenance. The next was family expenses— for instance, when parents or children need help or when somebody gets divorced or dies. And the third was healthcare, which included greater-than-budgeted costs for dental healthcare, prescriptions, nursing homes, in-home care and home accommodation.

The researchers found that 83 % of households experience a financial shock for one of these reasons annually— and sometimes more than one. Sixty percent of those shocks come in the rainy-day expenditure category, while 29 % are family-related and 58 % are healthcare-related.

When a shock does come, lower-income retirees are typically far more devastated. The annual expense, on average, represents 13 % of their retirement income, while their well-heeled counterparts would see the greater expense representing just 7 % of their retirement income.

Unexpected expenses ironically tend to increase with income( since those with higher income can afford them). However,“ the share of these expenses relative to income tends to decrease for those with higher income,” the brief said, adding that the average works out to 10 % of annual income per household.

That means, the brief suggests, that retirees should set aside at least 10 % of their income as emergency savings for one year. If looked at as a lump sum covering a 25-year retirement, the total would amount to 2.5 years of retirement income.

( The brief noted that the full amount would not need to be in a liquid account.)

In households with older people who have less than $ 50,000 in retirement income, only 47 % would be able to cover one year of unexpected expense with cash. Another 12 % could cover it with a combination of cash and dipping into their IRA / 401( k) assets. That leaves 41 % who would be unable to cover one year of expense even after spending all their cash and retirement assets.

For clients with between $ 50,000 and $ 99,999 of retirement income, 68 % would be able to cover one year of unexpected expenses with cash, 17 % could do it with cash and IRA / 401( k) assets, leaving 15 % unable to cover them at all.

And for clients with $ 100,000 or more in retirement income, 72 % would be able to cover a year of unexpected expenses just with cash, and 23 % could do it with cash and IRA / 401( k) assets. Just 5 % wouldn’ t be able to cover one year’ s financial shock at all.

— Jennifer Lea Reed

10 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2026 WWW. FA-MAG. COM