Do Retirees Need an Emergency Fund?

by Maurie Backman | Updated July 17, 2021 - First published on Sept. 24, 2019

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Everyone needs savings for unplanned expenses -- even retirees.

Everyone needs savings for unplanned expenses -- even retirees.

Sometimes life throws unwanted financial surprises our way. Your otherwise functional car could stop running out of the blue. Your home's heating system could stop working in the heart of winter. Or, you could get hit with a costly medical bill. That's why you need an emergency fund -- ideally, three to six months' worth of essential living costs. That way, if you encounter an unplanned expense, or lose your job for a period of time, you'll have savings to tap, thereby avoiding debt.

But what if you're retired, and therefore aren't collecting a paycheck from a job? Do you still need emergency savings on hand when you have guaranteed Social Security income every month, plus an IRA or a 401(k) to tap?

Why retirees need emergency savings

As a retiree, you may be receiving consistent Social Security benefits that help sustain you on a monthly basis. But are those benefits enough to cover a larger bill that pops up out of the blue? Chances are, no. And that's why you need an emergency fund -- not to replace a paycheck from work (since, well, you're not relying on one), but rather, to have a means of paying a huge expense your regular retirement income can't cover.

Without an emergency fund, you risk racking up debt later in life. And that could prove quite problematic when you're on a fixed income and can't afford to take on another monthly expense -- a debt payment. 

While you may have access to funds in an IRA or 401(k) that you could conceivably access in a pinch, that money is likely tied up in investments. Now that's a good thing, because by investing your savings during retirement, you're allowing your money to keep growing. The problem, however, is if you need to withdraw from an IRA or 401(k) to cover an emergency expense, you risk cashing out investments at a time when they're down, and taking a financial loss in the process. That's an option, but it's not ideal.

A better bet, therefore, is to have some cash tucked away in a savings account. That way, you can withdraw from it at any time without running the risk of losing money.

Now for working folks, an emergency fund with three to six months' worth of living expenses is what's generally advised. If you're retired, you may not need to follow that guideline. Rather, you can get away with saving a sum of money you consider to be substantial enough to bail you out of a jam. That could be $2,000, $5,000, or $10,000. It really depends on your circumstances, as well as your personal comfort level. The key, either way, is to have some savings on hand that you can access immediately if the need arises.

Remember, being retired doesn't exempt you from unplanned bills. Quite the contrary -- if you've been hanging on to an aging home or vehicle, you may be more likely to face costly repairs. So do yourself a favor and put some money into a savings account, even if you have a healthy amount of savings in a retirement plan. What you'll lose in growth on that cash, you'll gain in peace of mind.

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