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Why Retirees Still Need an Emergency Fund

By Christy Bieber – Oct 14, 2021 at 7:30AM

Key Points

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Don't assume that emergency savings are no longer important after you stop working.

Chances are good you've probably heard that you need an emergency fund large enough to cover three to six months of living expenses. Having money in an emergency savings account can help you cover unexpected expenses or cope with a reduction in income resulting from a job loss.

Sometimes, however, people assume they'll no longer need this after retiring because they don't have to worry about losing their job.

The reality, however, is that it's just as important (if not more so) for seniors to have emergency savings after leaving the working world. There are a few key reasons why.

Two older adults smiling and taking a selfie.

Image source: Getty Images.

Why retirees still need an emergency fund

Once you are a senior, unfortunately, emergencies don't just stop happening. While you no longer might be at risk of a job loss causing an interruption of income, there's still a huge chance that you could face unexpected expenses.

In fact, the chances of surprise costs could be even higher than when you were younger. That's because you're aging and your health might be worse. And your house might be aging along with you, so there could be a greater chance you'll need expensive repairs. 

1. You aren't able to rely on earned income

If these emergency expenses happen as a retiree, you may have even fewer financial options than you did while you were working. For example, you won't be able to just pick up some extra hours at work to cover the costs. So if you don't have an emergency fund, your only options could be to either take money out of your retirement nest egg or borrow. And neither choice is a good one.

2. Avoid retirement account withdrawal risks

If you're forced to take an unexpected distribution from a retirement account to cover emergency costs, this could affect your ability to maintain a safe withdrawal rate. That could put you at greater risk of running out of money later in life because you've drained your account too fast.

3. Avoid tax consequences

You could also face the tax consequences of an unexpected distribution since you'll be taxed at your ordinary rate on withdrawals from retirement plans (unless you're taking money out of a Roth account). The increase in income could sometimes even push you to a higher tax bracket and/or render Social Security benefits partly taxable.

4. Avoid going into debt

Going into debt also isn't ideal as a senior if you have a fixed income, since you'll be adding a new monthly bill to your obligations. This could mean you need to withdraw more from retirement funds later to pay those monthly bills or cut corners elsewhere (even if there isn't much wiggle room in your budget). You'll have less time and ability to recover from these kinds of financial setbacks once you're older and not earning a paycheck anymore.

Because of these issues, having an emergency fund is absolutely crucial in your later years. If you don't already have enough money to cover several months of living expenses, try to fit saving for emergencies into your budget ASAP to set yourself up for the most smooth-sailing retirement possible. 

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