What happens if an unexpected expense comes up in retirement?

I was updating the workshop we give on Financial Literacy for Seniors and realized that many seniors may have known how to budget and save when they were working, but they did not. Not because they did not know how, but because there was usually money coming in and somehow we were able to keep up with the bills. We know that financial planners recommend that we keep three to six month’s expenses tucked away in case of emergency or unemployment. When we were working many could not do that and now when we are retired, we don’t see any reason to have an emergency fund in case of unemployment.

We forget that unexpected expenses still come up. For example, my wife’s car needs repairs that are going to cost about $1500, which is an unexpected expense.  Last year we provided some help to a family member who needed help. All kinds of things can happen where you need to dip into your capital.

The reality is that most of us are not prepared for an unforeseen emergency. Only 40 percent could cover an unexpected $1,000 expense, according to a survey from Bankrate.com, a personal finance web site. Many would be forced to borrow cash or use a credit card, which may cause us problems later.

If your income is coming from your Canada Pension and Old Age Security or a pension that is super safe you may be fine. Super safe means that you have a company or government pension that is highly secure financially.

But that doesn’t describe most retirees if they have a pension, which is not guaranteed. In today's environment, many seniors are getting a pension from employers that are shaky, pensions that are not stable and investments that can lose money in a market crash.

If you are among the few retirees who have paid off their mortgage and can do with one car, your emergency fund might be a little less than when you were working. If you own your own home then you may consider a home equity line of credit to help pay unexpected expenses. Usually, it doesn’t cost anything until you use it. If there is a problem then you can cover the expense and will have time to pay it off slowly over time.