When you’ve finally reached retirement and are feeling comfortable that your nest egg of savings will take care of your financial needs for as long as you need, there’s one more thing to consider.
Fox Business’ recent article, “What Nest Egg? Two-Thirds of Americans Can't Cover $1,000 Emergency,” talks about the importance of maintaining an emergency fund so you don’t take withdrawals from your retirement accounts.
Seniors depend significantly on their retirement funds in retirement—as well as their Social Security and pensions. But rather than keeping a contingency fund of three months of savings, retired seniors should really try to save up even more for the likely event that they need personal or medical care down the road. While it's more difficult to save when you don't have a steady income every month, it is possible and important.
An emergency fund is a good idea at every stage of an adult's life, but why is it even more important in retirement? Once you’re retired, you’re typically living off of savings and fixed income from investments and Social Security—not a salary. And, as individuals age, their typical annual expenses for health care usually go up because the risk of disease or injury can be higher.
Do Baby Boomers need an emergency fund in addition to their retirement savings? While you don’t need to have an emergency fund in a separate bank account than your savings, depending on your own ability to budget, it could be a good idea. The recommended amount of money in an emergency fund is based on a person's current and projected cost of living, but a good rule of thumb is about six to 12 months of average living expenses—and the more the better.
What needs to go into creating and maintaining an emergency fund? Take a look your current insurance coverage—including life and health insurance—as well as your average monthly burn rate (or your total monthly cost of living). Next, list any dependents you’re currently assisting or may need to help in the future—like children, grandchildren or friends. Also consider your current health and any existing conditions, the anticipated increase in health insurance costs and the future costs of estate planning—as well as any senior services that may be required like assisted living, skilled nursing, home healthcare and hospice.
When should you use an IRA for those unforeseen emergency expenses in retirement? You should have a good idea of your liquid assets, outstanding debt and any equity you have in real estate or traded securities. IRAs and 401(k)s can be solid backups to emergency fund accounts, but they can take longer to liquidate, so the proceeds may not be readily available in an emergency. Don’t rely on them heavily for your emergency funds.
Saving specifically for an emergency will ultimately protect your retirement planning.
Reference: Fox Business (August 14, 2016) “What Nest Egg? Two-Thirds of Americans Can't Cover $1,000 Emergency”