Does My Retirement Need an Emergency Fund?

Saving emergency funds is not something you are unfamiliar with. During the working years, everyone encourages six months of living expenses put aside. This advice does not stop in retirement. You may experience many of the same potential emergencies that require access to that savings. However, in addition, during retirement, you are solely responsible for providing your own paycheck.

What emergencies may happen during retirement?

Much like your working years, you may run into those events where you need to tap into your rainy-day fund—house repairs, car breaks down. You may even help family members who run into unexpected financial needs. Building up your emergency fund provides ease if the unexpected does occur.

Another unforeseen emergency expense may be surprise medical bills. Health care costs are rising and having money set aside should you need to cover these costs will greatly impact your wellbeing down the road.

The golden rule emergency funds before and during retirement: have saved 6 months of living expenses.

Can I invest my emergency funds?

While the answer is yes, you need to make sure that all you have saved is protected. Your first option would be a traditional savings account. Easily accessible, the only downside is that your money earns next to nothing with interest.

Some folks may consider a CD, but you must be careful with early withdrawal penalties if you need the money before its maturity date. You may even designate your emergency funds to another retirement account such as an IRA. However, tax-deferred accounts such as an IRA or 401(k) are not like withdrawing from a savings account. If you pull from one of these as emergency money, it will add to your taxable income. And if you are under a certain age, you may be penalized for early withdrawal.

Can a reverse mortgage serve as an emergency fund?

If you or your spouse are over 62 years of age, using the equity on your home is an option. You may take monthly payments or only a lump sum of what is needed. Make sure what you are using it for is an emergency.

How can I reduce the need to use my emergency funds?

While having the funds handy is highly encouraged, a certain way to reduce the need to use your emergency funds significantly is evaluating the unforeseen expense. Can the car repairs be covered under your insurance? Is the roof of your home leaking, and will your home insurance cover any of it? Carrying insurance on certain things like the car and home will help with those unexpected events.

It is still very important to keep in mind the need for at least six months of living expenses to be set aside.


How to Face Your Retirement Risks: Think in Buckets

Since the old paradigm of retirement will do more harm than good in this current world, tackling the Top Ten Risks can be tricky.

Why won’t the old paradigm work? The first reason is folks nowadays live into their 80s when decades back that was not as common. Because retirement age back in the late 20th century was 55, many retirees waited until years past their retirement age to fully leave the workforce. Another major contributor to retirement plans back then were pensions. Social Security (SS) was on the table then, too. Folks could easily retire and enjoy their golden years off their employment pension and SS. Now, a lot of retirement is unfortunately up to the employees.

Beyond understanding SS and Medicare, balancing your assets over taxable, tax-deferred, and tax-free accounts is key to the success of your risk-free retirement. This is known as the Three Bucket System.

First and foremost, the taxable bucket is designed for emergency funds. Having 6 months of your living expenses in this bucket permits less risk. You are protected in case of emergency, and you are not exposing your savings to extra taxation.

The second bucket is tax-deferred and is a bucket folks overfill. While this bucket varies individually, there are some ‘rules’ to be mindful of. Your required minimum distributions (RMDs) should be low enough to not create provisional income (too much would cause your SS to be taxed). Secondly, you do not want them to exceed your standard deduction.

Filling the other two buckets means you can successfully begin filling the third bucket up: tax-free. The sooner you do this, the better off your risk-free retirement will do. Things that can be done for this bucket are Roth conversions or buying a life insurance retirement plan.

**We strongly encourage you to listen to our podcast Retirement Risk Show episode “Break Down the Top 10 Risks Facing Your Retirement” for a deeper dive into the information provided in this blog. For even more on the 10 Risks Top Ten Risks and strategies to reduce them during retirement, register for our webinar “Getting Safely Through Retirement.”