Tuesday, August 18, 2015

Handling Unexpected Expenses After Retirement

After three financially uneventful years of retirement, it has finally happened–we have been hit with a huge, unplanned expense that could not be anticipated.  We knew that big ticket items like a replacement for our 2005 Toyota Matrix or our aging appliances are upcoming within the next 3-5 years and have plans in place to incrementally save for those.  But earlier this year, out of the blue, we were informed that our condo building is one of the many buildings and houses across North America that installed plastic Kitec pipes for its plumbing system between 1997 and 2005.  It has been determined that there is a defect in the fittings or connectors between the Kitec pipes that could cause them corrode prematurely and possibly burst, leading to significant flooding.  The longer the pipes have been in place, the higher the risk of failure.  Given that our building was erected in 2003, time is of the essence to have these pipes replaced and the cost will be borne by each owner, since it does not fall under the jurisdiction of the reserve fund.  A class action suit has been launched against Kitec, but the settlement date is so far away and there are so many complainants that not much money will be awarded and definitely not enough or in time to pay for the pipe replacements.

The Kitec pipes can be identified by the colours of their tubing, which are bright orange for hot water lines and bright blue for the cold water lines.   They could be running behind our showers, bathtubs, toilets and washer/dryer units, and underneath bathroom and kitchen sinks.  Getting to these pipes could involve cutting holes through drywall, and even worse, through marble tiles.  The estimated cost of replacing the pipes comes in around $10,000.  The cost of repairing the damage done to our condo, which includes replacing marble and drywall, and repainting, will not be known until a contractor determines how many access holes need to be created and where.  At this point, we're guessing we need an additional $5000-$8000, since we have marble tiles in both of our bathrooms and specialty paint with a textured finish in our main bathroom that will be difficult to replicate.

Suddenly, we need to come up with an extra $15,000 - $18,000 within the next 6 months or so.  This is where the "contingency" part of our retirement strategy kicks in.  Since we do have a bit of time to save some of the money, our first approach will be to cut back on discretionary spending.  While going out less often for restaurant meals and watching fewer live theatre shows will help a bit, where we will get the biggest bang for our buck will be to cut back on vacation spending.  Since we enjoy traveling abroad, when preparing our post-retirement budget, we set aside a healthy amount of money to spend on this each year.  In the past two years, we've taken advantage of this by embarking on 6-7 week trips to Europe.  Next year, we will cut right back and just take a short 1-2 week trip within Canada or even within USA, which won't cost much despite the poor exchange rate on the Canadian dollar since we have saved up US currency from our US dividend stock.  If we feel that even this short trip is stretching our income, then we can consider a Toronto staycation.  Depending on how soon we need the money, we can temporarily borrow  from our emergency cash float, where we aim to always keep sufficient funds to pay up to 3 months of regular expenses.  Adhering to our game plan to slowly reduce the value of our RRIF accounts while our taxes are still relatively low, we could make one-time taxable withdrawals of any excess dividends accumulated in our RRIFs, making sure we leave enough to still meet our yearly minimum withdrawal criteria.  Finally as a last resort, we can consider taking money out of our TFSAs tax-free, with the goal of reinvesting that amount once we save it up again in a future year.

So we have many options and strategies at our disposal for addressing large expenses that arise suddenly.  While we did not anticipate this specific expense, we knew that we had to be prepared in general for unexpected spendings that could arise.  Accordingly, we are not as panicked about the situation as others might be, since we put careful thought in advance as to how we would respond to just such an occurrence.  It is now simply a matter of methodically putting our contingency plans into action. 

1 comment:

  1. Wow - That looks familiar. Luckily it happened to me while I was still making a pretty good pay check. Also the roof, all the appliances, even a lot of my ceilings and walls are new. That pretty much leaves a hurricane to ruin my day. Great blog. I'll be referring back to it.