Retirement Planning and Natural Disasters

Whether it’s hurricanes slamming Florida, including the recent Hurricane Milton, floods tearing up parts of New Mexico, or wildfires burning in New Jersey, extreme weather threatens lives and livelihoods across the United States. According to the National Centers for Environmental Information, as of September 2024, there have been 20 confirmed climate disaster events with losses exceeding $1 billion each in the U.S. Absorbing the costs of these events poses a significant financial risk, jeopardizing even the best-laid retirement plans.

Some of the most popular retirement destinations have an increased risk of natural disasters. H&R Block’s 2023 Outlook on American Life report revealed that most boomers (born between 1946 and 1964) moved to Florida, Texas, Arizona, North Carolina, and South Carolina in 2021, post-pandemic. Southwestern states are seeing more heat waves, droughts, and wildfires, while East Coast states are prone to hurricane winds and storm surges. Considering natural disasters when retirement planning helps retirees and hopeful retirees make informed decisions to protect their assets and well-being.

Types of Natural Disasters and Their Impact

Natural disasters come in various forms, each affecting different regions and posing unique challenges for retirees. Here are some of the most common natural disasters across the U.S. and their impact. 

Hurricanes

Tropical cyclones are often called hurricanes in the North Atlantic and Pacific Oceans, typhoons in the Western Pacific, and cyclones in the Indian and South Pacific Oceans. A storm becomes a hurricane, typhoon, or cyclone when it reaches 74 mph or higher. Retirees should be aware that strong winds, heavy rainfall, and a low-pressure center (called an eye) can cause severe damage and flooding. According to AARP, researchers found higher death rates among nursing home residents during the weeks after hurricanes Katrina and Irma.

Hurricanes are rated on the Saffir-Simpson scale based on sustained wind speeds ranging from Category 1 (the weakest) to Category 5 (the strongest). These storms pose significant risks to coastal and island communities and nearby inland areas. In 2023, eight hurricane disasters were declared. Of all recorded hurricanes in the U.S., Hurricane Katrina in 2005 was the costliest, with over $200 billion in losses. Hurricane Milton’s costs are still being calculated but could reach as high as $34 billion.

Earthquakes

Earthquakes can cause significant structural damage, making homes uninhabitable and necessitating costly repairs. Earthquakes are common in states like California and Alaska, but one unexpectedly struck New York in April 2024. The largest recorded earthquake in the U.S. was a magnitude 9.2 that hit Alaska in 1964. The earthquake and the ensuing tsunami took 131 lives and caused about $311 million in property loss. Retirees should consider the structural integrity of homes and local building codes when choosing retirement locations.

Tornadoes

Tornadoes are violently rotating air columns extending from a thunderstorm. Their funnel shape, caused by powerful winds that can reach up to over 300 miles per hour, destroys buildings, uproots trees, and ruins lives. According to the NOAA National Severe Storms Laboratory, about 1,200 tornadoes are reported annually nationwide.

Tornado season refers to the time of year when the U.S. experiences the most tornadoes. The peak season for the southern plains is from May to June, while in the Gulf Coast, it occurs in the spring, and in the northern plains and upper Midwest, it typically happens in June or July. Some of the deadliest tornadoes in U.S. history have claimed nearly 700 lives.

Floods

In 2023, 24 flood disasters were declared in the U.S. Four flooding events had over $1 billion in losses. The financial impact of floods includes property damage, increased insurance costs, and potential displacement. Areas like the Midwest and Southeast are particularly prone to flooding, but high rainfall, rising sea levels, and oceanic events can also cause flooding.

Since the 1970s, the percentage of the U.S. senior population living in coastal areas has increased by more than 80%, even though these areas are also among the most vulnerable to catastrophic flooding. Retirees should consider these risks despite the appeal of moving by the sea.

Wildfires

Wildfires are large, uncontrolled fires that spread rapidly across natural landscapes. Dry vegetation, high temperatures, strong winds, and low humidity fuel them. Wildfires may spark from lightning, campfires, or discarded cigarettes. Fires destroy homes and entire ecosystems; smoke can severely affect air quality for years afterward, leading to respiratory problems for survivors. The water damage from extinguishing fires can also destroy any hopes of returning to normal. 

Although they can strike anywhere, wildfires are increasingly common in the western United States, such as in California, Oregon, and Colorado. But the Texas Panhandle Wildfires of 2024 burned over one million acres, and the Maui Wildfires in 2023 resulted in a tragic loss of over 100 lives and over $5.5 billion in damages. The risk of wildfires should be a significant consideration for retirees looking to settle in these regions.

Preparation Costs

Preparation for natural disasters involves more than just creating evacuation plans. It includes saving a robust emergency fund, as well as ensuring that you have adequate insurance. 

Insurance and Costs 

You may need different types of insurance to mitigate disaster risks in your area. The precise types of insurance are region- and hazard-specific. The amount of coverage you will need can vary significantly depending on the location, the type of natural disasters prevalent, and home prices in your area. 

Homeowners in hurricane-prone areas might need windstorm insurance, while others may require flood insurance. 

“A standard homeowners insurance policy, also called an HO-3 policy, covers your home against wildfires, tornadoes, hurricanes, hail, and other common storms, but not flooding from bodies of water,” said Michael Orefice, senior vice president of operations at SmartFinancial, a digital insurance comparison engine. 

Orefice continued, “The natural disasters that are usually excluded from coverage are floods, earthquakes, landslides, and mudslides, and for these, you’d need to buy separate policies. That said, if an excluded peril, like a landslide, occurs due to a covered peril, such as a windstorm, there may be grounds for the landslide to be covered by insurance.” 

While it is possible to buy separate, add-on coverage for exclusions, these can significantly raise the cost of living. 

And getting insurance, especially affordably, is getting harder to do. “Some major insurance carriers have limited or stopped selling policies in over 20 states, including California and Florida, due to a spike in natural disaster claims over the years,” said Orefice. Many companies no longer issue new policies, even if they’re willing to maintain or renew old ones.

Alejandra Rojas, a trauma-informed finance professional at The Money Mindset Hub, added that retirees “want to have as much peace of mind as possible when it comes to retirement; thus, supplemental health, identity theft, homeowners, and long-term care insurance [also] become a priority to safeguard retirement.”

Emergency Funds

A robust emergency fund is helpful for everyone, but retirees can see the most value if they live in disaster-prone areas. 

“Ideally, an emergency fund will cover around six months of your expenses,” said Rojas, but this amount will vary on location, family size, and lifestyle. It is important to remember that low-cost-of-living states like Arkansas and the Dakotas are still susceptible to deadly and costly natural disasters, so more than six months might be appropriate. Understanding FEMA’s risk maps, IRS tax relief for those affected by disasters, and relief programs for the area around your home can help you decide where to retire and how much to save.

How Do Natural Disasters Affect Pension Plans?

If you are eligible to receive a pension, you’re lucky—they’re becoming less common as private employers have shifted away from defined benefit plans to defined contribution plans. Some public service employees are still eligible, but the payment amounts may need to be supplemented with 401(k) plans, individual retirement accounts (IRAs), Social Security, personal savings, investments, or income from a second career to keep pace with the cost of living in retirement years.

Natural disasters can significantly impact pensions, savings, and investments. Disasters tend to cause market volatility, which can lead to sudden drops in the value of investments. This can dramatically affect retirees who rely on consistent withdrawals from these accounts to cover daily expenses. Depending on the size and scale of a disaster, aspiring retirees may need to take out funds from these accounts earlier than anticipated, generating fees and tax bills.

Generally, the IRS automatically identifies taxpayers in covered disaster areas and applies for relief, said Hannah Black, a senior tax research analyst with The Tax Institute at H&R Block. However, taxpayers may still receive a late filing or payment penalty notice even if they qualify for relief. 

“This situation might occur if the taxpayer moved to the disaster area after filing their return and does not have an IRS address of record in the disaster area,” Black said. In that case, a bit of self-advocacy goes a long way. Contacting the IRS—as well as any banks or creditors— can help get penalties abated or forgiven.

Diversified investments across different asset classes reduce exposure to any singular sector that could be affected by a disaster. Maintaining a portion of savings in low-risk or liquid assets can provide a safety net. Additionally, retirees should regularly review and adjust their investment strategies to ensure alignment with their risk tolerance and financial needs. Financial planners specialized in retirement and disaster relief programs can provide guidance to their clients about where to locate their retirement homes and how to protect retirement funds from all kinds of eventualities.

The Bottom Line

Natural disasters can significantly impact retirement costs by increasing insurance premiums, reducing property values, and potentially draining savings. Sound retirement planning must take these unfortunate possibilities into account. Better-informed retirees can choose safer locations to live and thrive—while also preparing for the cost of mitigation measures like insurance and investment diversification.