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Planning for retirement means focusing on investment strategies and your possible income sources, such as Social Security or a retirement account. However, one very important element of retirement that is often overlooked is maintaining an adequate emergency fund to cover any unexpected expenses that may come your way during retirement.
An emergency fund is a savings account specifically used to cover unexpected expenses or financial emergencies, such as medical expenses, home repairs, or a loss of income.
The general rule of thumb when building an emergency fund is to save enough money to cover three to six months of expenses. Retirees, however, should consider keeping more money stowed away in emergency savings, especially if they are living on a fixed income, like Social Security.
Key Takeaways
- Build a larger emergency fund in retirement than during your working years, aiming for at least a year of expenses to protect against health care costs, home repairs, and market downturns.
- Keep your emergency fund in an accessible but interest-generating account like a high-yield savings account.
- Take into account your monthly expenses, health status, income, and living situation when determining how much you need in your emergency fund.
- Make a plan for how to replenish your emergency fund after using it with your retirement income.
- Review your emergency fund annually to make sure your savings are keeping pace with inflation and your changing needs.
Why It’s Important To Have an Emergency Fund in Retirement
Entering retirement brings on a new set of financial circumstances that will make having an emergency fund extra important.
“Retirees often face higher and more unpredictable expenses, such as health care costs and home repairs, without the safety net of a regular paycheck,” explained Jake Falcon, founder and CEO of Falcon Wealth Advisors. “Having a larger emergency fund provides a buffer to cover these unexpected expenses and helps maintain financial stability during retirement.”
1. Unpredictable Expenses
Life’s surprises don’t stop when you retire. Major home repairs, replacing an old vehicle, and unexpected family or medical needs can come up without any warning.
Jason Fannon, CFP and senior partner at Cornerstone Financial Services identified the most common surprise expenses: “The most common surprise expenses for retirees are medical (including dental, as many don’t have dental insurance), housing (roof, driveway, basement flooded, furnace, A/C, hot water tank, HOA assessments), and auto related costs (old vehicle is failing, new tires, repairs).”
Important
Without an emergency fund, these expenses may force you to tap into your retirement investments sooner than you planned, possibly during a downturned market.
2. Market Downturns
Retirees who rely on investment portfolios for their sole income will face the risk of a possible market downturn. Having a fully funded emergency fund provides an important financial buffer through market volatility, meaning you can avoid selling your investments at a lower price to cover your basic living expenses.
This protection is becoming more and more important as pensions are becoming increasingly rare, making retirees more dependent on market-based retirement accounts.
3. Rising Health Care Costs
Health care costs often increase with age and can be highly unpredictable. Even with Medicare coverage, out-of-pocket costs for serious illnesses, specialized treatments, or long-term care needs can quickly go beyond your planned budget.
Falcon pointed out several health-related scenarios that make an emergency fund crucial, including “health care costs—even with Medicare, retirees may face significant out-of-pocket expenses for prescriptions, co-pays, and non-covered services.”
4. Protection Against Debt
Without any liquid (cash) savings, emergencies might force retirees to turn to credit cards or personal loans. Accruing debt during retirement can be particularly dangerous, as limited income makes it more difficult to pay down debt balances quickly.
5. Peace of Mind
Perhaps one of the most underrated benefits of an emergency fund is the mental peace of mind that comes with knowing you can handle any financial surprise that comes your way without derailing your retirement plan or budget.
Figuring Out How Much You Should Have in Your Emergency Fund
Determining what size emergency fund is right for you requires balancing several retirement-specific factors, including your lifestyle, monthly expenses, and your overall financial situation going into retirement.
Monthly Expenses
Start by calculating your essential monthly expenses, including the cost of housing, food, utilities, health care, and transportation. This baseline number will help you determine your minimum monthly needs during an emergency.
Jake Falcon advised that “retirees should determine the amount needed in their emergency fund by evaluating their monthly expenses and considering potential unexpected costs. This includes regular living expenses such as housing, utilities, food, and transportation, as well as health care costs, insurance premiums, and any debt payments.”
Income Sources
Take into account the stability of your household retirement income. If you plan to rely heavily on market-based withdrawals rather than a guaranteed fixed income (like pensions or Social Security), you may need a larger emergency fund.
“Emergency funds serve as a supplemental financial resource that interacts with other retirement income sources by providing liquidity and flexibility,” said Falcon. “Social Security, pensions, and required minimum distributions (RMDs) offer regular income, but they may not be sufficient to cover unexpected expenses.”
Health Status
The current health of you and your spouse, as well as family medical history, should play a role in determining how much to set aside in your emergency fund. People with chronic conditions or a family history of serious illnesses may want to set aside additional funds, especially as they get further into retirement.
Important
A 65-year-old individual will need an average of $165,000 in savings to cover health care costs in retirement, according to the 2024 Fidelity Retiree Health Care Cost Estimate.
Living Situation
Homeowners should factor in potential home repairs and maintenance into their emergency fund. Falcon notes that, “as retirees age, their homes may require more frequent and costly repairs to ensure safety and accessibility.” If you think you may require additional support in your home, or you eventually plan to move into an assisted living facility, you may want to factor this into your emergency fund as well.
The Right Amount Is More Than You Think
When asked how many months of savings retirees should maintain, Jason Fannon recommended “keeping one year’s worth of living expenses in a purchased money fund. This allows the retiree to cover unexpected expenses without incurring debt or disrupting investments.”
To take it even further, Falcon added, “On top of the emergency fund, we like to maintain five years’ worth of planned spending not in stocks and instead have those funds allocated to investment-grade bonds.”
Strategies To Build and Maintain an Emergency Fund in Retirement
Building and maintaining an emergency fund that will support you throughout your retirement requires intentional planning and preparation.
1. Start ASAP
If you are approaching retirement without an emergency fund, establishing one as soon as possible should become a top priority. This may require temporarily reducing other spending or investment contributions.
2. Choose the Type of Account You Prefer To Keep Your Savings
Your emergency fund should be easily accessible, but still earn you some form of returns. Fannon suggested “keeping one year’s worth of living expenses in a purchased money fund. This allows the retiree to cover unexpected expenses without incurring debt or disrupting investments. It also provides them with a reasonable rate of return on cash. For example, Schwab U.S. Treasury Money Fund pays nearly 4% and is liquid in one business day.”
Other options to consider include:
- High-yield savings account: A high-yield savings account allows you to make cash withdrawals while earning higher interest than traditional savings accounts, plus features FDIC insurance.
- Money market accounts: Money market accounts, which operate like both a checking and savings account, often offer better rates of return than savings accounts with similar liquidity.
- Short-term CDs: Short-term CDs provide higher yields for portions of your emergency fund, but you may be penalized for withdrawing the money early.
3. Set up Automated Contributions
Even in retirement, regular contributions help maintain and grow your emergency fund. Schedule automatic transfers to come out of your primary checking account on the same day as your scheduled income deposit. During retirement, you can direct a portion of any pension or Social Security payments to your emergency fund while building or replenishing your savings.
4. Consider if You Need To Withdraw Money
Before tapping into your emergency fund, first exhaust all other options. Determine if the expense is truly an emergency. Setting personal boundaries and guidelines as to what you consider an emergency will help you determine whether you should, or should not, withdraw money from your emergency fund.
Before making a withdrawal, first consider if insurance would cover part of or all of the expense. Could the expense be deferred or reduced through negotiations or an interest-free payment plan? Don’t forget to evaluate the tax implications of different funding sources before making the decision to withdraw from your emergency fund.
5. Replenish Funds and Review Regularly
After using your emergency fund, Falcon advised: “Replenishing an emergency fund can be done over time through monthly budgeting or a well-thought-out liquidation of assets (stocks or bonds). This should be completed by an investment advisor who has a good grasp on cash flow and tax planning.”
Also consider:
- Creating a detailed plan to rebuild the fund.
- Adjusting your budget temporarily to replenish the missing funds faster.
- Reviewing your emergency fund annually to ensure the amount is enough to cover your current life circumstances.
6. Consider Other Retirement-Specific Scenarios
Falcon highlights additional retirement-specific scenarios that make emergency funds essential: the cost of long-term care and inflation. “The need for long-term care can arise unexpectedly, and the costs associated with assisted living or nursing home care can be substantial,” said Falcon.
Additionally, “the rising costs of goods and services can erode purchasing power, making it essential to have a financial cushion to cover increased expenses.” Planning for the increased cost of living as you age is another important factor to consider when building and continually reassess your retirement fund.
How Much Should Retirees Keep in Their Emergency Fund?
Financial experts generally recommend keeping up to a year or more of essential expenses in your emergency fund, which is more than the typical amount advised for working adults. The larger cushion is necessary because retirees face more uncertainty without regular employment income, as well as higher health care costs.
What Is the Best Place To Keep My Emergency Fund?
The best place to keep your emergency fund is somewhere where your money is easily accessible, and ideally provides you with safe and reasonable returns. People often choose to put their money in a high-yield savings account, which can return anywhere from 3-5%.
Where Is the Safest Place To Put Your Retirement Money?
The safest place to put your money is in an FDIC-insured account at a bank or credit union, like a high-yield savings account, which provides you with returns and quick access to cash. You can also consider a prepaid card or cash, although these options carry a higher risk of being lost, damaged, or stolen.
What Counts as an Emergency Expense for a Retiree?
Emergency expenses for retirees often include unexpected medical expenses, urgent home repairs or appliance replacements, crucial vehicle repairs or replacements, or family emergencies that require your financial assistance.
The Bottom Line
An emergency fund is not a luxury, but a necessity in retirement planning. Having a fully funded emergency fund will protect against unexpected expenses and market volatility while offering you peace of mind during your retirement years.
Remember that your emergency fund is a personal safety net designed specifically for your life circumstances. As both Fannon and Falcon suggested, working with a financial advisor can help you determine the right amount for your situation, taking into account your health, housing, income sources, and overall retirement strategy.
By maintaining a fully funded emergency fund, you are protecting the retirement lifestyle you’ve worked so hard to achieve while guaranteeing that unexpected expenses do not turn into financial disasters.
