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While most retirees obsess over 401(k) balances and Social Security benefits, many overlook inadequate property and casualty insurance — a critical blind spot in their financial planning that could cost them years of retirement dreams.
“Inadequate insurance can delay retirement by five years, or even 10, depending on how dramatic the loss is,” Meaghan Dowd, author of “Protect Your Lifestyle” and director of insurance at Holistiplan, said in a recent episode of Decoding Retirement.
According to Dowd, 7 in 10 people have never had a professional insurance assessment.
The concern is amplified in retirement because retirees “may be going to more of a fixed budget where every penny counts a little bit more,” Dowd said. When major losses occur, the financial impact can force retirees to tap into savings they’ve spent decades building.
Dowd shared a sobering example of how poor coverage decisions can derail retirement plans.
A couple, she said, went on a five-day vacation without arranging for anyone to check their home. When they returned, they discovered a burst pipe had been running continuously, causing extensive damage to their kitchen, basement, HVAC system, and electrical components.
Despite having $1 million in dwelling coverage, the couple faced $400,000 in out-of-pocket expenses because they lacked replacement cost coverage on their personal property. This forced them to withdraw hundreds of thousands from their retirement savings to rebuild their home to its original quality.
“When you really think of that over a long span, that’s what caused the delay — them having to take that $400,000 out of somewhere to replace their home,” Dowd said.
Read more: Homeowners insurance: What it covers and how much you’ll pay
A resident sweeps the water out of the first-floor apartment affected by a flood on May 20, 2024. (Andreas Arnold/picture alliance via Getty Images) ·picture alliance via Getty Images
The difference between dwelling coverage and replacement cost coverage on personal property can make or break a retirement plan. Dwelling coverage protects the structure of your home, but personal property — everything that would fall out if you turned your house upside down — requires separate consideration, she said.
Without replacement cost coverage, your belongings are valued at their depreciated worth. A 10-year-old television that originally cost $1,000 might only be worth $500 today, or nothing at all if it’s reached the end of its estimated lifespan. When applied across all damaged belongings, Dowd said this depreciation can leave homeowners significantly short of what they need to replace their possessions.
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According to Dowd, many homeowners don’t realize they’ve outgrown their current insurance provider until it’s too late. But there are warning signs.
For instance, if your insurer only offers $25,000 in water backup protection but you have $100,000 in basement finishes, you’ve likely outgrown your current carrier. Similarly, not all carriers offer cyber coverage, which protects against smart home hacking and has become increasingly important.
Homeowners should also be aware of insufficient liability limits: High-net-worth carriers can often provide $5 million in liability coverage, while standard carriers may cap out at $2 million.
And standard carriers replace with “similar kind and quality” materials, while high-net-worth carriers use “same kind and quality” — a crucial distinction for homes with custom finishes.
Dowd drew attention to other financial decisions and retirement lifestyle factors that carry risks.
For one, retirees face a particular vulnerability when they begin withdrawing from protected retirement accounts. While 401(k)s and IRAs enjoy strong creditor protection, once those funds hit your checking or savings account, they become accessible to creditors in the event of a lawsuit.
“If you have a bad auto accident and your auto insurance is not enough, creditors, a judge can say those funds are now accessible to make that other party whole again,” Dowd cautioned.
Read more: What to do after a car accident: Your step-by-step guide
Another factor is hired help liability, as the majority of states exclude workers’ compensation from home policies, Dowd said. When handymen, house cleaners, or home health aides work on your property, you could face liability for injuries or employment practices issues.
Lastly, insurance market challenges related to climate change have led to some “really heartbreaking” outcomes, Dowd said.
She described examples of Florida homeowners unable to sell properties built before current wind mitigation standards and entire communities in Missouri that never rebuilt after tornado damage because neighborhoods “did not have the right insurance.”
Even cash buyers face challenges with properties in flood zones. While flood zone location “doesn’t affect you today,” when you go to resell, Dowd said, “most people don’t have $500,000 cash to pay on a house,” meaning flood insurance requirements could significantly impact resale value.
Covington, Louisiana, Signs warn about flooding potential in a suburban neighborhood. (Jim West/UCG/Universal Images Group via Getty Images) ·UCG via Getty Images
The most critical mistake retirees make, according to Dowd, is shopping for insurance based solely on price.
“A lot of people start at the shopping and go straight for that savings, because obviously in retirement we may be going to more of a fixed budget,” she said. “But that’s not always the best way to go with insurance, because you get what you pay for with insurance sometimes.”
A proper coverage review should begin with a 15- to 20-minute conversation about your lifestyle, assets, and risk tolerance — not just your address and a quote request.
“If they’re not willing to have that conversation to learn about you, to understand you, and really do a full assessment of your needs, you might just want to hang up the phone and go find someone else,” Dowd said.
Dowd recommends five critical steps for annual insurance reviews:
Recalculate replacement cost: Home values and upgrade costs change rapidly. If you haven’t reviewed your coverage since purchase, it’s likely inadequate.
Assess lifestyle changes: New activities, from dog walking to international travel, can create liability exposures.
Understand your local market: Rising rates may seem steep until you realize half your neighbors can’t get coverage at all.
Document home improvements: Electrical, plumbing, and roof updates often qualify for discounts.
Implement risk mitigation: Water shut-off valves, security systems, and proper contractor vetting can reduce both risks and premiums.
Insurance, Dowd emphasized, shouldn’t be viewed as an area to cut costs in retirement, but rather as “an investment vehicle and a protection for all of the planning and saving you’ve been doing for decades.”
Got questions about retirement? Email Robert Powell at yfpodcast@yahooinc.com, and we’ll do our best to answer it in a future episode of Decoding Retirement.
Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.
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