When it comes to preparing for retirement, saving is only half the battle. Even if you have hundreds of thousands of dollars socked away for the future, it can be challenging to ensure your money lasts the rest of your life.
However, there are precautions you can take to safeguard your retirement savings. One of them is establishing a withdrawal strategy so that you don't blow through your money too quickly by overspending each year in retirement. Another, though, might be more surprising: Create an emergency fund.
How an emergency fund protects your savings
Unexpected expenses are a part of life. Your old car finally gave out and you need to buy a new one. Your basement flooded and requires costly repairs. Or a sudden injury led to a trip to the hospital. These types of costs are bound to pop up, but they can be detrimental in retirement.
Because you're living on a fixed income in retirement, you likely don't have much wiggle room in your budget. Especially if your savings are sparse and you're just scraping by financially, you may not have a couple hundred or thousand dollars to spare to cover an expensive emergency.
Even if you do have a robust retirement fund, if you withdraw more than you should one year to cover an unexpected cost, that could potentially throw off the rest of your retirement plan. Also, considering it's unlikely you'll only face one unexpected expense over several decades in retirement, overspending each time you face one of these costs could lead to running out of money too soon later in life.
That's where the emergency fund comes in. When you have a solid emergency fund in retirement, you have a designated place to pull cash from when an unexpected expense inevitably crops up. That helps protect your retirement savings, guaranteeing that your money lasts for as long as possible.
Building a retirement emergency fund
Traditionally, most financial experts advise saving enough to cover three to six months' worth of general living expenses in your emergency fund. However, a retirement emergency fund is slightly different, and you may need to save more than the recommended amount.
When you're living on a fixed income in retirement, it will be challenging to replenish your emergency fund after you've withdrawn from it. And because you'll likely be spending at least a couple of decades in retirement, your emergency fund should ideally last the rest of your life without you needing to restock it. That means you'll probably need more than a couple thousand dollars stashed away to cover any potential unexpected expenses.
Exactly how much you should save depends on multiple factors, such as how long you expect to spend in retirement and what your current savings look like. If you plan to retire early or have reason to believe you'll be spending several decades in retirement, you'll need a larger emergency fund. Also, if you expect money to be tight in retirement because your savings are limited, it's even more important to have a healthy emergency fund so you won't need to sacrifice your quality of life just to pay the bills.
There's no exact number for how much you should save, but it never hurts to save more than you think. The money won't go to waste no matter what, so even if you end up saving more than you need in an emergency fund, you can always use it for other retirement expenses.
Balancing multiple financial goals
If you're already struggling to save for retirement, adding another financial goal to the list may seem overwhelming. But it is possible to balance saving for retirement and building an emergency fund.
Which goal you should focus on more depends on your unique situation. Typically, it's a good idea to prioritize saving for retirement while still saving at least a little in an emergency fund each month. Especially if you're earning matching 401(k) contributions from your employer, you'll want to save enough in your retirement fund to at least earn the full match.
Those who still have several decades left before retirement may want to give more focus to an emergency fund, however. Although you should still be saving what you can for retirement, if you don't have an emergency fund and an unexpected expense pops up, you'll need a safety net so that you won't need to withdraw money from your retirement savings to cover it.
There's not necessarily a right or wrong answer as to exactly how you should prepare for retirement, but it's important to build a solid emergency fund to supplement your savings. You've worked hard to save for retirement, and an emergency fund can help your hard-earned savings last well into your golden years.