Emergency Fund for Retirement: How Much Should You Save?

A retirement emergency fund offers peace of mind and convenience because you can’t predict when emergencies will arise or how much they will cost. It acts as a hedge that protects your retirement savings when it’s doing the actual work you want it to do – which is to generate an income for your retirement.

Here are some reasons why retirees need an emergency fund.

Why Retirees Need an Emergency Savings Fund

• Protection against inflation: Inflation cannot be controlled, so you might end up spending more than planned on goods during your retirement years. The emergency fund helps you bridge the gap between the actual cost of goods affected by inflation and what you expected to spend for such goods and services.
• Repairs: There are several situations which can be covered by auto and homeowners insurance. However, unexpected expenses may arise that’ll require you to make large payments. Deductibles like flood damage and water, which aren’t covered by a homeowner’s policy, can be taken care of by a retirement emergency fund.
• Spend on family: Your retirement emergency funds can help you support your children and grandchildren over the years. It provides funds that allow you to help family and friends push through financial situations.
• Protection against market downturns: Market downturns can affect your investment. The emergency funds take the stress off until the market recovers.
• Medical expenses: Several Medicare items such as prescription drugs, co-insurance, and co-pays, in some cases, make you spend more than expected. Emergency funds help bridge the gap between what’s covered by Medicare and what isn’t covered.

How Much Should You Save to Your Retirement Funds?

Saving to your retirement emergency fund depends on how stable your finances are. To determine how much to save: calculate your basic monthly expenses like utilities, medical, housing, auto and travel, debt, property taxes, insurance premiums (such as long-term care, auto, homeowners, etc.), pet care, and necessities (big box stores items/groceries and food).

Next, calculate your three to six months of expenses and start saving for it.

For instance, if you have total monthly expenses of $4,000, you can calculate your emergency balance by multiplying it by 3 or 6.

That will be $12,000 for three months, $24,000 for six months, and $48,000 if you want to save for a 12-month emergency fund.

You can save up to $24,000 in two years if you start putting away $100 every month.

Safest Place to Save for an Emergency

The safest account to save your emergency retirement funds is a savings and money market account. These accounts are easily accessible when the needs arise, unlike using taxable brokerage or CDs accounts.

The best choice comes down to the rate of return, convenience, and comfort. Consider saving to brick-and-mortar local banks if you can’t wait for funds to transfer between banks when you need to access your account.

Using an online savings account could be a better option, if:

• You spend a lot and want to distance yourself from your emergency fund.
• It won’t bother you if a transfer takes up to five days to reflect.
• You want higher interest rates than the rates which brick-and-mortar banks offer.

Enquiring if a bank issues beneficiaries and transfer on death (TOD) is of great importance when opening an emergency retirement savings account. The TOD gives your loved ones access to your savings without having to pass through probation. TOD can also help you achieve your retirement goal if you want your emergency savings to be part of your end-of-life planning.

In conclusion, while investing in your retirement savings, keep in mind that you need a cash cushion to enable you to absorb life’s shocks as you head into the next adventure. That’s what an emergency fund offers.