According to a recent survey from GOBankingRates about savings habits, over 50% of seniors reported that they are saving up an emergency fund. While this is always good advice for those who are still working, if you’ve saved up enough to retire, do you really need an emergency fund in place?
The answer is yes, you absolutely need an emergency fund in retirement. Not only can emergencies still affect you, but having access to cash in a pinch is important, especially with no more income coming in from a job.
We’ll cover the details of what an emergency fund is, how to use it, and seven reasons you should consider having an emergency fund in retirement.
What Is an Emergency Fund?
An emergency fund is extra savings that is set aside in an accessible account to be used in case of financial emergencies. Experts recommend setting aside at least three to six months’ of expenses in a liquid savings account to help handle unexpected emergency expenses.
Where Should You Save Your Emergency Fund?
Emergency fund savings should be in an accessible account, such as a savings account or money market account. You can also put it in a high-yield savings account to earn a higher interest rate.
But the most important thing is that you can access the funds immediately in a pinch.
How Do You Use an Emergency Fund?
Emergency funds are not for general expenses or last-minute trips but are for true financial emergencies only. And no, Christmas is not an emergency. Or Amazon Prime Day sales.
When you do have an actual financial emergency — such as transmission issues — you can transfer the funds to your main checking account for use. Some experts recommend paying with a credit card and then paying off that card with the emergency savings, so you still get the protections of a credit card but pay it off right away.
Emergency fund money is for unplanned expenses only. If you have an expected upcoming expense, it’s best to start saving for it ahead of time, before it becomes a financial “emergency” later.
7 Reasons You Should Have an Emergency Fund in Retirement
No matter how much you have saved in your retirement accounts, having a separate emergency fund is important for these reasons:
1. Emergencies Still Happen in Retirement
Emergencies don’t care if you’re working or retired, they still happen, no matter what. Car troubles, medical issues, household repairs and other emergencies will continue to happen when you’re retired, and having some funds set aside to pay for those issues can help give you peace of mind.
Plus, that peace of mind can lower your stress in what should be some of the most relaxing years of your life. If you don’t want to stress out about money during retirement, an emergency fund can help.
2. Emergency Funds Are Liquid
Your cash isn’t made of actual liquid — rather, the funds are more readily accessible than other retirement income sources. Having cash set aside lets you cover emergency expenses on the spot, such as last-second car repairs, an unexpected trip to the doctor or family members in need of cash.
Most retirees have a majority of their funds invested in the market. And you can’t access Social Security checks early. Having access to immediate cash can help you make it until you get your next check. Plus, you won’t have to wait for stocks to sell or money to transfer.
3. It Can Help You Avoid Selling Investments Early
When you have an emergency and need access to cash quickly, you don’t want to have to wait until your broker can sell some investments. But maybe even more important is that you aren’t forced to sell investments early.
If you have to sell investments to cover emergency expenses, you might be hit with a bigger tax bill than expected. And if the market is down and you have a financial emergency, it’s even worse. You’ll be forced to sell your investments at a lower price point than if you were able to cover the emergency with cash and wait until the market recovers to sell.
4. High-Yield Savings Accounts Offer Great Rates Right Now
While emergency funds aren’t invested in the market, they can still earn a decent yield right now. Many high-yield savings accounts are offering up to 5.00% APY on deposits, giving depositors a great risk-free rate of return.
High-yield savings accounts allow you to still have access to your funds but pay a much higher rate than normal savings accounts. And funds are protected, with FDIC insurance on deposits up to $250,000. Just remember that the APY is variable and can go higher or lower, depending on nominal interest rates in the U.S.
5. It Can Help Save Your Monthly Budget
When you retire, you start living on a fixed income. Emergency funds protect your monthly budget, allowing you to stay within your planned spending for retirement. If you don’t have an emergency fund in place, it might destroy your budget and cause you to have to draw from other assets.
You can think of having an emergency fund in retirement as another form of insurance. It protects your monthly budget from getting hit with unexpected expenses and keeps you on track financially.
6. It Can Be a Smart Investing Strategy
Did you know an emergency fund can actually be a smart investing strategy? In fact, an emergency fund can be part of the retirement “bucket strategy,” where retirees separate their investment accounts into different “buckets,” including a cash bucket.
The idea behind the strategy is to set aside several years of living expenses — usually around three — in a more liquid investment account, such as U.S. Treasuries or a high-yield savings account. This bucket is used to withdraw funds for use in retirement, as well as for covering financial emergencies. This bucket of cash can earn a decent yield, but is also there as a buffer.
If the market declines, having extra cash set aside allows you to pull money from your cash bucket for a few years, giving the market time to recover before you sell any investments to refill the cash bucket.
So having a large emergency fund in retirement can actually be a prudent investing strategy.
7. It Can Help You Fight Inflation
Inflation has caused a massive increase in prices, and this makes it much harder to live on a fixed income in retirement. And while Social Security gives annual cost-of-living raises, your investment account may not.
Having extra cash set aside can help you afford the increase in groceries, gas and energy costs without having to generate additional income or sell assets. Having a cash buffer in place allows you to keep up with your bills as things get more and more expensive.
If you’re retired, you need to have an emergency fund. Not only does it help you weather the storms of life, but it can actually be a great investment move, if you have the right strategy. Plus, with yields so high in high-yield savings accounts and U.S. Treasuries, you can still earn a decent return in your emergency fund.
GOBankingRates surveyed 1,037 Americans aged 18 and older from across the country between Sept. 5 and Sept. 7, 2023, asking five different questions: (1) How much money do you hope to save in the next year?; (2) What are you saving money for?; (3) How many savings accounts do you have?; (4) What is the primary method you use to save money?; and (5) What is your biggest roadblock/challenge in trying to save money?. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
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