Having an emergency fund is vital no matter your stage of life, even heading into your retirement, says an article from The Balance, “How Much Emergency Savings Do Retirees Need?”. In retirement, having money set aside for emergencies is useful especially if you don’t want to be dipping into your nest egg when unexpected costs pop up.
Okay, so having an emergency fund is important, but how much should retirees have?
Typically, this fund is used to pay expenses that come up without warning when you have cash flow changes or your debt increases because of a loan or something else. In retirement though, an emergency fund is geared more towards paying unexpected health care expenses. A retiring 65-year-old couple can expect to spend $280,000 on healthcare, states Fidelity, and this does not include the cost of long-term care! In life and especially retirement, the unexpected can happen when it comes to health, you could have a serious fall or be diagnosed with a severe illness. Bills could pile up if your insurance or Medicare doesn’t cover the entire cost. This is where your emergency fund would come in.
To answer the “how much” question, there are two things you need to consider: your normal monthly spending and how conservative you want to be in saving for emergencies.
In order to determine your monthly expenses, examine your monthly budget. If you are not retired, estimate your retirement budget – go higher than you might expect. To estimate your retirement lifestyle, The Balance recommends looking at:
-Housing costs, including a first mortgage or second mortgage for a vacation home
-Food and entertainment
-Debt payments if you have credit cards or loans you're repaying
-Health care expenses and medications not covered by insurance or Medicare
-Insurance premiums for health, life or long-term care insurance
-New hobbies acquired in retirement
-Costs associated with starting a business or side hustle
Now, compare those expenses to your retirement income. This includes any tax-advantaged retirement plans, Social Security, a pension, an annuity or your taxable investment accounts. Use these numbers to determine your minimum baseline of income you will need each month to cover your essential living expenses.
Most say to have 6 months of savings in your emergency fund, but in retirement, it is encouraged to have enough to cover 12-18 months of expenses, this puts you on the safe side in case the unexpected happens. Take the baseline amount money you need to cover your essential expenses and multiply it by the number of months. If your monthly retirement expenses are $6,000 and you want to be able to cover 15 months, then you will need to have $90,000 set aside for emergencies.
The numbers can seem daunting, but planning ahead for this before you retire will enable you to start putting the funds aside. It is never too early to save for retirement!
As to the best place to keep this emergency fund, talk with your financial advisor and estate planning attorney to determine the best way for you. A Roth IRA or high-yield savings account might be two options to consider, but there are certain regulations around them that you will want to be familiar with.
At Family Estate Planning Law Group, as part of our ongoing client care program, we align, verify and continually track all of our client’s assets, so you can be assured your savings vehicles and other assets will be aligned with your estate plan before and during retirement and upon your death.
Remember, an emergency fund is key at any stage in life because you never know what life will throw at you, so as you plan for life, working and retired, having a fund for emergencies can give you some peace of mind.
To learn more about this and other estate planning topics, explore our blog and visit our website to schedule your consultation today!
Reference: The Balance, Dec., 31, 2018, “How Much Emergency Savings Do Retirees Need?”