Consider financial surprises when planning for retirement

Question: In retirement planning, unexcepted financial surprises can seriously disrupt savings. How can I prepare for and protect against such financial shocks?

Answer: By their very nature, unexpected financial shocks are exactly that — unexpected. Therefore, it is almost impossible to precisely anticipate or fully plan for their occurrence.

About half of pre-retirees surveyed in a Society of Actuaries study reported experiencing some type of financial surprise, along with more than four in 10 retirees. About 20% of pre-retirees also reported shocks that reduced their assets by 25% or more as well as reduced their purchasing power by 10% or more.

Medical expenses are among the most common financial emergencies. Health insurance is the first line of defense against such unanticipated bills, said life coach Elizabeth McCourt.

"Making sure you have insurance for yourself (and family) is especially important ... (but) even with the best policy, you can still be saddled with massive medical debt if you aren't prepared," she added.

For expenses not covered by insurance, health savings accounts and flexible spending accounts are two benefits offered by many employers. While both are funded through pre-tax payroll contributions, HSAs are specifically designed to help defray costs of high-deductible health insurance policies and unused balances can be rolled over to the next calendar year, according to Investopedia website.

FSAs can be used for other purposes beyond medical expenses, such as child care. However, the major difference is FSA deposits must be used within the same calendar year they are made or lose them.

These special accounts can help ease a financial shock without dipping into general savings.

Since retirement is the largest financial goal for most people, it makes sense to start contributing to specific retirement accounts as early as possible. Rarely these days can workers count on an employer-sponsored pension plan or only Social Security to cover their total living costs during their golden years.

To augment retirement savings, many consider making early and frequent contributions to sponsored pension or 401(k) plans, particularly if the employer matches employee contributions. Another common retirement option, individual IRAs, can be set up at a financial institution, such as a bank or brokerage firm, to hold investments — stocks, mutual funds, bonds and cash — that are earmarked for retirement.

Even though an IRA is for retirement, money can be withdrawn for dire emergencies; however, it will mean sacrificing the investment gains earned on the principal, accord to NerdWallet.

Also, NerdWallet advises considering other sources for emergencies rather than raiding your IRA. For example, a zero% interest credit card introductory offer, a peer-to-peer loan or personal loan might be alternatives to cover unforeseen additional expenses.

Sudden spending shocks are a reality at any age, said Roger Whitney, host of the "Retirement Answer Man" podcast.

"When they happen in retirement — after income from work stops — they aren't as easily absorbed," he said. "To be better prepared, create options for your future self to deal with a shock. Building cash reserves above a normal emergency fund, eliminating revolving debt to lower fixed monthly payments, or working part time can help create financial cushions to help you be agile as your retirement life unfolds."

While unexpected financial shocks can't be fully anticipated, particularly during inflationary times, appropriate budgetary forethought and planning can help mitigate the impact on retirement preparation.