Financial planners generally advise keeping about six months' worth of expenses in an easily accessible emergency fund. The idea is if you have a large, unexpected expense, or if you lose your job, having a sufficient emergency fund allows you to avoid tapping into your retirement savings, using credit cards, or otherwise do more financial harm than good.
But what about after you retire? After you leave the workforce for good, can't you simply use your retirement savings for whatever you need -- including unexpected expenses? Or should you still maintain a separate emergency savings account?
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Do you need an emergency fund after you retire?
The short answer is yes. It's still a good idea to maintain a separate emergency fund in retirement, although there is more to the story. Here are three of the biggest reasons why maintaining an emergency fund even after you retire is a smart idea.
Protect your income-generating investments
One key reason is to help with budgeting. Many retirees use specific withdrawal rates (such as the popular "4% rule") to regulate the outflows from their account and ensure that they'll have enough money throughout their retirement.
An emergency fund prevents you from having to withdraw more money than you planned from your retirement funds. Since most retirees keep the bulk of their retirement accounts invested in a mix of stock-based and fixed-income investments (not in cash), having an emergency fund in a high-yield savings account prevents you from having to sell investments you don't want to sell -- especially in bad market environments.
Avoid big tax bills
Another reason to maintain an emergency fund after you retire is to prevent unexpected tax bills in retirement. If all of your money is in retirement accounts like 401(k)s and IRAs, having to take surprise withdrawals could have significant tax implications. This is true even if you have large cash balances in your retirement accounts.
Consider this example. Let's say that you have a 401(k) when you retire and that you have a significant amount of the account in cash equivalent investments like money market funds. Your financial advisor tells you that your 401(k) balance should be more than adequate for a long and comfortable retirement. So it might seem like you don't need a separate account for emergencies.
However, let's also say that you need to withdraw $20,000 for unexpected home repairs that aren't covered by insurance.
Assuming your 401(k) isn't a Roth account, withdrawals from the account are considered taxable income -- even money you take out to cover emergency expenses. If you're in the 24% tax bracket, for example, this $20,000 withdrawal could result in $4,800 in additional federal income tax that you weren't planning to pay. And that's in addition to any state income tax you might have to pay.
A higher likelihood of costly emergencies
Last but certainly not least, it's important to realize that there are certain types of elevated expenses that are more likely in retirement. Most significant is healthcare, because older individuals are generally more likely to require unexpected medical care than younger ones. Sure, Medicare and other insurance cover many things, but the average 65-year-old couple who retired in 2023 will have $315,000 in out-of-pocket healthcare expenses throughout retirement, according to Fidelity.
The bottom line is that while an emergency fund may serve some slightly different purposes after retirement (like avoiding extra taxes), it's still important to have one. Maintaining an emergency fund in an easy-to-access place can help you protect the retirement income stream you worked so hard to create, can help minimize taxes during "expensive" years, and can help deal with the unpredictable medical costs retirees are likely to face.
