Why Emergency Funds Are Critical as You Approach Retirement

Common wisdom among financial experts holds that households should aim to establish cash reserves that can cover three to six months’ worth of living expenses during the primary working years. But as you prepare to step back from the workforce, it may make sense to build a larger financial cushion that will enable you to weather large unforeseen expenses without straining your budget, especially if you expect to live on a fixed income. A sufficient cash buffer will also protect your assets and investments as you navigate those contingencies that inevitably occur. Before you put in your papers, make sure you have considered these factors that make an emergency fund an indispensable component of a well-balanced financial plan for this exciting life stage:

A healthy level of savings can enable you to avoid setbacks and stress from unanticipated expenses that you will continue to experience in retirement.

Even if you no longer need to concern yourself with the possibility of a job loss as a retiree, emergencies and large, unpredictable expenses are still assured at any given point in life, from major home and auto repairs to costly dental work and unexpected tax bills. With quick access to a rainy-day fund, you will be better equipped to recover from these situations without having to make major adjustments, like foregoing a once-in-a-lifetime travel opportunity or plans for a home remodel or new landscaping. What is more, you will find it easier to avoid incurring high-interest debt that can eat away at retirement savings.

You will have a financial safety net that can prevent you from having to sell assets at a loss.

A major reason to have a dedicated emergency account as a retiree is that it can enable you to absorb financial shocks without having to sell an asset or liquidate investments in a market downturn. Especially for those who draw on retirement account distributions for income, preserving the value of an investment portfolio is critical. According to a study by Porch.com, home maintenance and repairs average upwards of $16,000 annually in many states, including California at $16,957 per year. Without ready access to needed funds, you may find yourself selling assets in unfavorable conditions to cover expenses like a roof replacement, new HVAC system, or an electrical rewiring.

You will be better prepared for rising health costs.

As the personal finance publisher Kiplinger has pointed out, health care costs increase each year — with retirees paying a higher percentage of their fixed income on medical expenses as time progresses. Even with Medicare, many retirees have significant unreimbursed expenses, including deductibles, co-pays, out-of-pocket costs for emergencies, and uncovered services. Given that it can be difficult to plan for these non-discretionary expenses, a dedicated emergency fund can be a valuable resource to tap so that you are not compelled to take on debt or sell investments when the market value is low.

You will be in a better position to help loved ones.

While everyone has a different level of comfort when it comes to helping family members in financial straits, it can provide tremendous peace of mind to have savings stashed away if this is important to you. While not intended to cover an adult child’s luxury vacation or a pricey holiday gift, an emergency fund can be a lifeline for a family member who suddenly loses a job, faces a major illness, or finds themself in an unstable home environment.

Why it makes sense to consult a trusted professional to set a target goal for your emergency fund:

Stashing a sufficient amount of funds in a safe and secure account that you can access quickly and easily will help you manage your daily cash flow and safeguard your long-term financial stability in retirement. At the same time, it is critical to balance your access to liquid funds with the need to protect your retirement savings from inflation, which erodes the value of your dollars and your buying power over time. Because investments offer a powerful defense against inflation, holding onto excess cash can prevent you from reaching your retirement goals.

Many financial experts suggest that retirees keep one to two years’ worth of expenses in cash and that they invest the rest of their savings in growth. However, your target level of savings will be heavily dependent on your financial situation and life circumstances. A qualified financial planner or wealth management advisor can help you determine a suitable amount of cash for your emergency fund that aligns with your overall retirement planning needs.

Set aside funds that will grow safely and provide convenient access whenever you need liquid assets.

Open a Money Market Account