During your working years, there's always the promise of the nextpaycheck to help cover life's unexpected expenses. However, once youretire, unexpected expenses can wreak havoc on your finances if youdon't have the savings to cover them.
An emergency fund is essential for retirees to help cushion life'scurveballs. Here's how you can start or maintain a stash of your own.
The importance of emergency savings for retirees
Aside from switching from a regular paycheck to a fixed income basedon your retirement savings and Social Security benefits, retirementholds the potential for more expensive emergencies.
While your auto and homeowners insurance policies can protect youfrom larger-scale expenditures, medical and family-related emergenciesare a high likelihood during retirement. From increased costs ofmedications to children and grandchildren who need help out of afinancial bind, your precious retirement savings could take a big hitwhen life happens. When you use the money you're meant to live off forthe rest of your life to meet unexpected expenses, you're putting yourfinancial well-being at risk.
During retirement, an emergency fund can give you the confidence thatyour retirement savings will be around to support you for years to comesince you won't be using that money to cover life's surprises.
Consider setting up automatic transfers to your emergency fund the dayfollowing your monthly retirement disbursem*nt or Social Securitypayment.
How to start an emergency fund
It's easier than you might think to start an emergency fund to helpprotect your retirement savings, even if you're starting from zero.
First, figure out how much you need in your emergency fund. Whileexperts tend to agree that emergency savings should equal three to sixmonths of living expenses, you might not feel you need so much savedin retirement since you're not at risk for losing a job. However, you'llwant to have enough on hand to weather an expense that wouldotherwise put a crimp in your retirement savings.
Once you determine how much you need to save, you can use anautomatic savings plan to launch your emergency fund. You cancoordinate automatic transfers to a savings or money market accountthe day after receiving your regular Social Security or retirementdistributions each month. You can start small with the automatictransfers and gradually increase them if you find you can afford to savemore. Keep those automatic transfers going until you hit your savingsgoal.
If you feel you don't have enough left over each month, you can trythese tips for making adjustments in your budget to carve out room forsavings. Common tips for finding some extra cash to stash in savingsinclude cutting back on takeout and canceling unused subscriptions andmemberships until you have a comfortable-to-you amount in savings.
Maintaining your retirement emergency fund
Once you've hit your emergency fund savings goals, maintaining yourfunds is critical. As expenses come along that put a dent in your fund,go back to setting up automatic transfers to replenish your savings.
Besides keeping your savings replenished, it's wise to do a periodiccheck-up on whether you feel your emergency fund has too much or toolittle in it for comfort. A good rule of thumb is to check in on youremergency fund after every emergency. You can adjust your savingsupward or downward depending on your living expenses and lifechanges.
No matter where you're at with your savings goals heading into orduring retirement, it's never too late to start an emergency fund toprotect your retirement savings. By doing so, you'll protect your incomestream while creating a way for you to easily deal with anything lifethrows your way.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circ*mstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information. Diversification does not ensure against loss.
FAQs
Once you determine how much you need to save, you can use an automatic savings plan to launch your emergency fund. You can coordinate automatic transfers to a savings or money market account the day after receiving your regular Social Security or retirement distributions each month.
How much should a retiree have in an emergency fund? ›
If you're retiring soon, make sure your emergency fund is in good shape. A financial planner suggests having 12 months' worth of expenses set aside when you retire. You'll have a backup if the market falls, or if you need funds for unexpected medical expenses.
Where to keep an emergency fund in retirement? ›
The best places to put your emergency savings
- Online savings account or money market deposit account. ...
- Bank or credit union savings account. ...
- Money market mutual fund. ...
- Checking account. ...
- Certificate of deposit. ...
- The stock market. ...
- Savings bonds. ...
- At home.
Keep in mind that emergency funds can actually get too big, and Orman is particularly conservative in her recommendation that people save up to 12 months of living expenses. Once you've set aside 12 months in emergency savings, it's important to take the next step, and that's to begin putting your money to work.
How to save an emergency fund when money is tight? ›
Steps to Build an Emergency Fund
- Set several smaller savings goals, rather than one large one. Set yourself up for success from the start. ...
- Start with small, regular contributions. ...
- Automate your savings. ...
- Don't increase monthly spending or open new credit cards. ...
- Don't over-save.
Is $20,000 enough for an emergency fund? A savings account with $20,000 is a good starting point for creating a substantial emergency fund. This will help you financially should an unexpected situation arise. However, if you face an extreme situation, $20,000 may only cover limited expenses.
Is $10,000 enough for an emergency fund? ›
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
What is too big for an emergency fund? ›
Your emergency fund could be too big if it exceeds three to six months' worth of expenses. That said, everyone has a different financial picture. Some people keep up to a year's worth of savings in an emergency fund, while others might find that sticking to closer to three months frees them up to pursue other goals.
What is the best asset for emergency fund? ›
Here are some of the best options for where to keep an emergency fund.
- High-Yield Savings Account. Opening a high-yield savings account to start an emergency fund makes a lot of sense. ...
- Money Market Account. ...
- Certificate of Deposit. ...
- Traditional Bank Account. ...
- Roth Individual Retirement Account.
First, don't lock up your entire emergency fund in a CD. Keep a comfortable amount in a savings account. This way, if you have a smaller emergency, such as a car breakdown, you still have the funds to cover it.
How much should you have in your emergency fund? The golden rule is to squirrel away at least three to six months of your basic living expenses for an emergency. That way, should a major life-shifting event set you back financially, such as a job loss, you'll have enough to cover your bills.
What is a realistic emergency fund amount? ›
To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses. So if you spend $5,000 per month, your first emergency fund savings milestone should be $2,500 to cover spending shocks.
Is $30,000 a good emergency fund? ›
For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account. These funds will help you deal with an unexpected job loss, major medical costs, or other emergencies.
What is the only place you should keep your emergency fund money? ›
Bank or credit union account — If you have an account with a bank or credit union—generally considered one of the safest places to put your money—it might make sense to have a dedicated account where you can keep and maintain these funds.
What is the 50 30 20 rule? ›
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
Is $5,000 enough for emergency fund? ›
For many people, $5,000 would be inadequate to cover several months' expenses in the event of job loss or an expensive emergency. If that is the case for you, $5,000 would not be considered an overfunded account.
What is the average nest egg in retirement? ›
What are the average and median retirement savings? The average retirement savings for all families is $333,940, according to the 2022 Survey of Consumer Finances. The median retirement savings for all families is $87,000. Taken on their own, those numbers aren't incredibly helpful.
