Do You Need an Emergency Fund in Retirement?

Time and again, we are told of the importance of having an emergency fund. It makes sense, especially for retirement. After all, retirees are likely to have unexpected costs creep up, just like everyone else does. But according to a BankRate survey, even a small unexpected expense could be a struggle for many households.   

In the survey, nearly 60% didn’t have enough savings to pay for emergency expenses. Almost half (45%) said they or immediate family had incurred a major emergency expense in the last 12 months. Among high-income households and college graduates, nearly half lacked enough savings to handle emergency costs.

While emergency expenses can affect anyone, they may create harmful setbacks for retired households. Many retirees live on a fixed income. Without the fallback of healthy earned income, like that in the working years, they could find unexpected expenses to be disruptive. All of this underscores the practical wisdom of having financial cushioning for emergencies.

So, what’s a target amount to have in an emergency fund? And what are some ways you can build up emergency reserves? Here’s a quick look at some strategies.

Saving for the Unexpected

So, how much should retirees have in emergency reserves? A common axiom for younger working-age households is to keep 3-6 months’ worth of living expenses stashed away. That way they’ve covered in case of a job loss or another income-disrupting event. Some take it a step further, pegging an optimal goal for younger persons at 6-12 months of money.

However, for people near retirement, things are different. Once you leave the workforce, you no longer have full-time employment wages as an income source. And while Social Security is a steady income source for many older Americans, it isn’t meant to be the only one. So, you will need to have some savings for emergencies.

Building an Emergency Fund While Working

For people below age 65 and still working, financial experts say a solid target is 12-18 months’ worth of living expenses. Why so much? Because Americans falling within the retirement age bracket can encounter costly, unexpected expenses in two areas: healthcare and housing. In fact, healthcare and housing costs tend to be two of the biggest areas of retirement expenditures.

Most people enter into retirement with money tied up in investments. It’s not unusual to have the bulk of your funds in 401(k)s, IRAs, and other retirement accounts. So, if you haven’t started building an emergency fund outside of those accounts, consider starting now while you are working. Experts recommend that the places you park your emergency savings be easily accessible. Having emergency funds tied up in investments might mean you having to sell at a loss should you need to liquidate them. And if the money is in the stock market, your total emergency savings can fluctuate depending on market activity.

With that said, an exact sum for your emergency stockpile will depend on your circumstances. This 12-18 months of money range is just a guideline. If that seems out of reach, nine months’ worth of income can be a smaller baseline. Now, what about people who are already retired?

What If I’m Retired?

Retired households tend to be in a different situation. Chances are they already have money coming in from Social Security. They may even be drawing income from other guaranteed sources like a pension or even an annuity. Even so, they will still need a financial buffer.

According to the Rule of 100, your emergency fund would be part of the “safe” proportion of your retirement plan — or the proportion that is protected from market risk. Say someone is 60 years old. 60% of their retirement money would be in the safe portion. With that said, the emergency reserves would be included, with experts saying an optimal target for liquidity could be 10% of a retirement portfolio.

What about from a monthly standpoint? Well, it depends on your complete financial picture, but a conservative stockpile target might be 6-9 months’ worth of income. Again, the goal is to have emergency savings that are liquid, and quickly accessible. Consider building up cold cash reserves in a savings account. You may want to think of other places as safeholds, including market market accounts and other vehicles offering safety and liquidity.

But you won’t want too much money wrapped up in emergency savings, as you’ll need to combat inflation. Confer with a knowledgeable financial professional to help you find an appropriate emergency savings goal and potential places you can hold your funds.

How to Build a Retirement Emergency Fund?

For most Americans, building an emergency fund in a few months just isn’t practical or even realistic. So, build up an emergency fund over time. Start small and pay yourself each week. If the budget is strapped, begin with smaller initial amounts and work your way up, even if it’s as little as $10-$25. Here are some strategies you can use to make saving easier:

• Put savings on autopilot by setting up automatic transfers. Have money taken weekly or monthly from a checking account and put into a savings account. Over time, you will adapt, and you may discover additional dollars you can stash away. You might even want to increase the amount of money being transferred, over time, so the balance grows even faster.
• If saving is hard, set gradual goals. A large target savings amount can be frustrating to work towards. For some, slow progress to a lofty savings goal may seem impossible. You may want to start out by working towards smaller goals, say emergency savings of $250, or $500. Once you reach one milestone, set a new, higher goal — in this case, for example, $750 — and work towards that. By stretching it out, you can build an emergency fund, piece-by-piece, and still keep it manageable.
• Go over monthly spending with a fine-tooth comb. No matter what, everyone has expenses that can be shaved down or cut out entirely. By monitoring where your money goes each month, you will probably find areas where you scale back spending. Fewer dinners out, magazine or TV subscriptions not being fully used, splurges on coffee, alcohol, or other drinks, entertainment… these are a few prospective areas to trim spending. If you haven’t already, keep track of your spending by putting together a monthly budget.
• Tap your tax refund. Many of us receive a tax refund every year. If you can do it, consider putting at least part of your refund into your emergency fund. Or thinking about using your tax refund on a “splurge” buy? Maybe reconsider and allocating your refund money into your emergency stockpile.

Final Thoughts

While these are some basic guidelines to follow, they can help you build your fund, step by step. Start slowly, save gradually, and in due time you will have a healthy emergency fund to protect you against unexpected expenses.

Building an emergency fund is a critical step. But it’s just one part of retirement planning. You may be ready for personal guidance in preparing for your financial future. Financial professionals at SafeMoney.com stand ready to help you.

Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral for a financial professional, call us at 877.476.9723.