A Retirement Plan Nightmare

We spend a lot of time here on unexpected, one-off, unbudgetable expenses that can blow up a retirement plan that doesn't have a lot of margin for error. Examples of this type of expense that I usually cite are new tires, a large veterinary bill and something on the house like a roof.

There is an element of luck to this too I believe. Some people have better luck on this front than others. We probably all know a couple of people for whom it is just one thing after another (unlucky). Part of planning for unexpected, one-off, unbudgetable expenses is a real assessment of whether you are generally lucky or unlucky with this sort of thing. I've suggested padding monthly expenses by $1000 and then maybe rolling over whatever is unused to pay for a vacation the next year. 

My wife and I have been pretty lucky with this issue over the years. That is until 2022. We had a lot of stuff come up. The big one was in August, our internet satellite dish took a direct lighting strike. We were home, I can't begin to tell you how loud it was, shook the whole house and knocked out the power. The damage involved a lot of little stuff and our solar inverter. All in, it was about $9500. We were not sure whether the insurance company would make us whole or not. Getting the inverter replaced dragged on for three months, the insurance adjuster provided almost no communication. Fortunately, we got a check a couple of weeks ago, they stepped up but we were emotionally prepared to get stiffed. 

We had a couple of big car things happen too. The master cylinder on our 4Runner went out. At first it was going to be $2300 but the shop was able to just order a replacement for the pump, still ended up being $1600. Our Tundra got a chipmunk in the flywheel of the air conditioner which cost about $330. Then the driver's side leaf spring broke, one of the slats snapped in half. The same shop was going to charge us $1300 to replace just the one side but we found another shop to replace both sides for $800 (don't replace just one leaf spring). 

Before all that happened we invested some money into our rental house. We bought an 8' x 20' shipping container for storage for about $4000 and installed a mini-split (combo a/c heater that is very efficient) for about $3500. 

It is not lost on us that we are very fortunate that we can take the bad news of a big fix-it bill, say "well that sucks" and then just write the check. The coincidental timing of the rental upgrades was unfortunate but every so often we're all going to have an unlucky run of large expenses. This sort of potential sequence of expenses is an example of why retirement plan resiliency and flexibility is so important. 

A $600,000 retirement fund kicking off $24,000/yr that maybe drops 20% in a year like 2022 and then $10-$15,000 worth of unexpected expenses pop up could seriously threaten the sustainability of that $600,000. If pinched, we could have waited on the inverter but if the insurance company never stepped up then we'd have effectively thrown away our initial outlay for the system if we didn't eventually replace it. We could have made due without the A/C in my car but the leaf springs and master cylinder had to be fixed. 

The right (or wrong) combination of unexpected expenses and poor market returns can absolutely do in a retirement plan, especially if it happens during the first couple of years of retirement. I've seen this hit people before and this type of scenario has greatly influenced my beliefs about creating at least one more income stream beyond Social Security and retirement savings and not wanting to be overly reliant on any one income stream.

That might sound very glass half empty but the way I look at it, no. I don't expect anything bad to happen but the pursuit of and being able to achieve resiliency and optionality is very empowering and satisfying. I'm motivated to avoid having to scramble in frantic desperation if something goes wrong financially. If that resonates with you, start working on this now.