Seniors who have finally reached retirement age after decades of work and smart planning may think they’re all set once their nest egg is funded. But that nest egg needs to be protected by an emergency fund—something which most Americans seem to have forgotten during their retirement planning. Fox Business’ 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 need to take withdrawals from 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’ 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.
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 that may need help in the future, such as 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. If you’re younger, you may want to look into a long-term care insurance policy to help cover some of the costs of healthcare as you age.
Should an IRA ever be used for emergency expenses during retirement? This presents a problem on many levels. First, it can take time to liquidate IRAs or 401(k)s, and you may not have time in a financial emergency. Second, there may be tax implications, depending on the accounts, your age, etc. Finally, if you are using significant assets for an emergency, you may be putting a big dent in your overall retirement funds.
Protect your nest egg by building up an emergency fund. Just as you saved and planned for retirement, do the same with an emergency fund. When an emergency occurs, and they inevitably do, you will be ready.
Without creating an estate plan, however, all your hard work saving might go to waste. It’s important to create an estate plan and communicate it to those who will have to implement it. This allows your loved ones to hear your wishes and understand their role in executing your estate plan. For more information about the importance of communicating your estate plan to heirs, explore our website and contact us to schedule your consultation today!
Reference: Fox Business (August 14, 2016) “What Nest Egg? Two-Thirds of Americans Can't Cover $1,000 Emergency”