Emergency fund needs change as you and your household change. That’s especially true in retirement, when you’re no longer collecting the comfy paycheck you’d gotten used to.
A few situations to consider: Perhaps your house is smaller, but it will still need TLC from time to time—leaky roofs and furnace replacements are not cheap. Maybe you’d like to keep your same car humming for longer, which means that its upkeep could add up. Or, at some point you may have to replace your vehicle. Many retirees may be reluctant, smartly so, to take on the debt of a car loan in retirement or make a big dent in a hard-working retirement portfolio for a new car.
Perhaps your medical bills are bigger? It can be nearly impossible to slap an accurate estimate on the uncovered portion of a major medical event, but having some buffer will help. At the least, it could buy you some time to raise or tap additional funds.
Sometimes it’s about someone else’s emergency—those you love. During the last recession in particular, adult children with lost jobs, divorces, medical issues, or other challenges returned to live under their parents’ roof as so-called “boomerang kids.” The economy is better, sure, but this unexpected multigenerational financial pinch could happen to any family at any time.
What is clear is that forgoing an emergency fund creates a risk that you might need to tap your Individual Retirement Account (IRA) or other sources that you’re expecting to stretch for a long retirement. It could strain your annuity income unless you set aside enough for the unexpected. And most risky, you could be forced to put expenses on a high-interest credit card.
How Much to Stash Away?
That depends on your comfort level. Some retirees will breathe easier knowing there’s readily available cash, period. Others have a fat home equity line available to draw on with a fairly fast turnaround—just make sure you understand any implications for your home value when doing so.
Conservatively, most financial advisors suggest that those at or near retirement have at least 12 months of liquid (meaning, easily accessible) funds available for unanticipated expenses, medical emergencies, or unexpected loss of income. Others suggest that if you’re near or in retirement, you might shoot for at least two or three years’ worth of cash in a liquid account. That emergency fund could allow you to weather a bear stock market without having to sell deflated holdings at an inopportune time just because you need the cash.
Can Your Emergency Fund Still Work Hard?
Once you have that emergency fund ballpark established and you enter retirement, it will be important to reserve space in your budget to regularly replenish the fund. You won’t need a new car every year, but if you do draw down on your savings for that car, the emergency funds should eventually be replaced for the next unknown. Remember, you’re trying to avoid large, lump-sum withdrawals from your retirement portfolio.
That also begs a bigger question. Is an emergency fund ever too big to just sit around—meaning it’s missing out on potential growth opportunities?
Let’s say a retired household calculates that they need $5,000 a month to live on. Even a relatively short six-month emergency fund tallies at $30,000. The thought of $30,000 “under the mattress” in a low or no-interest account is likely enough to make some retirees lose sleep anyway!
According to some advisors, one option might include stashing four months' savings in a conservative bond fund while keeping a few months' worth in a liquid savings account or money market account. Yes, the time for competitive interest rate shopping among savings accounts and money markets is returning with anticipated higher Federal Reserve interest rates.
Another option is laddering certificates of deposit so they mature at different times, which adds a measure of liquidity. Even if you must liquidate a CD early, you may be comforted that your overall interest collection will help offset any early withdrawal penalty in the case of an emergency.
Still, some advisors will argue that exposing your emergency fund to even a sliver of risk of financial loss defeats the purpose. You and your advisor will have to decide what “safety” means to you.
Hands-On Retirement Planning
Retirement planning isn’t a set it-and-forget it proposition. Your plans take thoughtful care, and the help of professionals.