Should You Have an Emergency Fund in Retirement?, #76

If you’ve attended one of my retirement readiness workshops, you’ve probably heard me say that every working person needs an emergency fund containing three to six months of income. But what about retirement? Should someone still keep an emergency fund even if they receive a steady retirement income? Listen to this episode to hear me go over the four things you NEED to know about having an emergency fund in retirement. 

You will want to hear this episode if you are interested in...

  • Do you need an emergency fund when you’re retired? [0:55]

  • How much money should you have in your emergency fund during retirement? [3:07]

  • Where should you keep your emergency fund? [5:29]

  • Where NOT to keep an emergency fund [8:58]

Find the right balance

Because most retirees have guaranteed income through Social Security, pensions, and other sources, the typical recommendation to have 3-6 months of living expenses in an emergency fund can be unnecessary. How much you keep in that fund depends on how much retirement income you receive and your expenses. It’s always a good idea to follow a budget and be aware of these numbers. If your income is greater than your budgeted expenses, you may not need as much money in your emergency fund. However, if your income closely matches your expenses, I’d recommend having at least three months of income or more saved in the fund, depending on where your money is invested. If the majority of your money is invested in pre-tax retirement accounts like traditional IRAs and 401ks, I would recommend saving at least three months of income for a rainy day. However, Roth accounts are post-tax, so if that’s where you keep your investments, you shouldn’t need to save as much. 

If you don’t have an emergency fund right now, that’s okay! It’s easy to set a little bit aside each time you take money out of your retirement accounts and slowly build up your fund. You can also take out a little more each time to create this cushion. The important thing is to make sure you keep track of how much you are withdrawing from your retirement accounts annually. You don’t want to accidentally put yourself in a higher tax bracket just to start an emergency fund. 

Location. Location. Location.

Choosing where to keep your emergency fund is a matter of preference and interest rates. You want to make sure your fund is kept in a comfortable place, but also in a place where it’s going to earn the most interest. One option is a high-yield savings account. However, the term “high-yield” has lost some of its luster in recent years. Your best bet is to do online research to find which banks offer the most bang for your buck. 0.5% is typically the highest interest rate you’ll be able to find. That means if you have a $50,000 emergency fund in a high-yield account, you will earn $250 annually. While that amount won’t necessarily make anyone run out and get one of these accounts right away, if interest rates go back up to what they were even a few years ago (between 2 and 2.5 percent), it could make a big difference in the future. 

Another great location for an emergency fund is a Roth IRA account because the money is already taxed. It may even be beneficial to look at your Roth IRA as your emergency fund in the first place. One of the major benefits of this kind of account is that once the account has been open for five years and the account holder has reached the age of 59 and six months, you can withdraw the entire balance without a tax penalty. Equally important to where you keep your emergency fund is where you shouldn’t. Avoid places that cost you penalties to withdraw funds or accounts that earn little to no interest like traditional IRAs and 401ks. For more information on where you should or shouldn’t keep an emergency fund in retirement, listen to this episode!

Resources Mentioned

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Should You Take Out a Home Equity Line of Credit in Retirement?, #77

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Should You Appeal Your 2021 Connecticut Property Tax Revaluation?, #75