How Much Should Retirees Keep in an Emergency Fund? 

Learning to set up an emergency fund.

One of the best ways to prepare for unexpected expenses is to build an emergency fund. An emergency fund can keep you from tapping your retirement account or taxable assets to cover surprise costs. 

Here, we look at why you need emergency funds in retirement—and what you can do to ensure that your emergency fund serves its purpose. 

Why Do You Need a Retirement Emergency Fund? 

An emergency fund covers surprise expenses that crop up throughout life. During your working years, an emergency fund can help you avoid going into debt when you lose a job or experience some other upheaval. You might not have to worry about job loss as a retiree, but additional unexpected costs can throw a wrench into your planning. 

Some situations where having an emergency fund can help during retirement include: 

  • Protect your investments. At some point during retirement, a market downturn is likely. Rather than drawing down your principal when stocks are falling, you can use your emergency fund to cover some of your costs. This reduces the number of assets you have to “sell low” and gives your portfolio a little extra time to recover. 
  • Make home improvements. Perhaps you need to widen your doorways, upgrade your bathroom or add a ramp as you age and need access to better mobility in your home. An emergency fund can also help you with costs, so you avoid drawing down your pension or tax-advantaged retirement account. 
  • Cover Medical costs. Not every unexpected healthcare cost will be covered by Medicare or other insurance. You can use an emergency fund or Health Savings Account (HSA) to help with these expenses while your investment portfolio continues to grow. 

Your retirement emergency fund complements other aspects of your budget. When used with Medicare, any money in an HSA, pension payments, annuity payments, and your 401(k) or IRA money, your emergency fund can be a good part of healthy retirement finances. 

How Much Do You Need in Your Retirement Emergency Fund? 

One emergency fund rule of thumb is to set aside at least three to six months’ worth of expenses for an emergency fund. How much you set aside in your emergency fund in retirement depends on what you spend each month and how long you want your fund to last if you decide to live off it for a limited period. 

For example, if your monthly expenses are $4,500, and you want to go for six months without drawing on other assets, you need to build up a retirement emergency fund of $27,000.  

Consider other assets you can draw on in a financial emergency. Some things to keep in mind include the following: 

  • Whether you have an annuity that provides a baseline for expenses. 
  • Your Social Security benefits. You might receive money each month and be able to rely on that. 
  • A guaranteed pension benefit that you can depend on regardless of market performance. 

Perhaps your expenses are $4,500, but you receive $800 per month from an annuity and $1,200 per month in Social Security benefits. Your monthly pension amount is $500. Your retirement emergency fund only needs to cover $2,000 worth of monthly expenses, reducing your six-month need to $12,000. 

Don’t forget to include your investment portfolio—including tax-advantaged and taxable accounts—and your asset allocation. Consider speaking with a retirement professional to determine a good allocation that can provide some income to complement your emergency fund. 

3 Places to Consider Keeping Your Retirement Emergency Fund 

Wherever you choose to put them, it’s important that you can easily access your retirement funds. It’s best if you don’t need to worry about accruing early withdrawal penalties or ongoing fees. Here are three potential places to keep your retirement emergency fund: 

  1. High-yield savings account. You can get access to your money quickly and easily, and rates paid by online banks can be much higher than traditional institutions. 
  1. Money market account. If you have a higher balance and want access to check-writing or debit features, a money market account can pay a higher interest rate and come with flexibility.  
  1. Roth IRA. You can withdraw your contributions at any time, penalty-free (there are restrictions on withdrawing earnings). Plus, you don’t pay taxes on earnings from a Roth IRA. You don’t have to worry about RMDs. However, you or your spouse must be working and meet the income requirements to contribute. Start this account before retirement and consider it a possibility for emergency savings. 

Avoid keeping your retirement emergency fund in a CD, traditional IRA, or other illiquid accounts that come with penalties. 

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