Do Retirees Need an Emergency Fund?

In light of recent world events, more and more people have realized the critical importance of their emergency fund. Many people are experiencing layoffs in light of COVID-19, and others are going through reduced work hours and income. Financial experts often advise that individuals and families who are mid-career keep between 3-12 months of living expenses in an accessible savings account in case of emergencies. However, there are rarely clear instructions for what retirees should do. 

After all, retirees may be in need of emergency funds, too - so, do they need an emergency fund? And what does that look like during retirement?

What Does an Emergency Fund Look Like in Retirement?

The short answer is yes, retirees absolutely need an emergency fund. Although retirees aren’t technically at risk for losing their income from a job since they’ve stopped working, they could still find themselves in a position where they need funds quickly. One key example that we’ve seen in 2020 is the possibility of market fluctuations. 

If investors experience a downturn in the market, following a typical withdrawal schedule could potentially harm the longevity of your portfolio. In these cases, having funds on hand that you can draw from to preserve your portfolio can be convenient. 

Other times, retirees may experience a financial crisis or emergency. For example, unexpected medical expenses can potentially throw a curveball in your budget as a retiree. Although many people have planned for medical expenses in retirement, extended hospital stays after getting sick with the coronavirus (or the flu, or any number of other potential medical conditions), might require you to pay bills quickly - which can be hard to do if your funds are tied up in your portfolio.

In a perfect world, retirees will have up to two years of living expenses set aside in an accessible account or within their investment portfolio in principal-protected funds.

How Can You Free Up Cash, and Where Do You Save It?

You have several options available for your retirement emergency fund. Ideally, you’ll have a  notable emergency fund saved up and set aside before you enter retirement. However, that’s not always feasible. That means that, during retirement, you’ll need to boost a savings account using the various streams of income you have. This might include:

  • Social Security
  • Withdrawals from your 401(k) or IRA
  • Income from a part-time job or consulting

You’ll want to adjust your expenses to prioritize saving a portion of your income every month to slowly grow your emergency fund over time. The key is that you want to be able to access your emergency funds immediately if necessary. This emergency fund can be kept in a traditional savings account, or in low-risk, accessible funds (like bonds). In some cases, it may make sense to convert a small portion of your portfolio to lower-risk bonds, or cash, to set aside as your emergency fund. However, before making a decision like this, it’s critical to talk with a financial advisor who can walk you through tax implications of cashing out a portion of your portfolio, and whether or not it’s in your best interest. 

We Can Help

Are you a retiree working to grow your emergency fund? We’d love to talk with you. Get in touch with us today by clicking here.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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