No matter your age, it’s wise to have money in a savings account for unplanned expenses. In fact, most people are advised to sock away enough cash to cover three to six months’ worth of living expenses. The logic there is that having that much money on hand could get you through a period of reduced income or could be used to cover an unplanned bill, like a major home repair.
If you’re still working, deciding how much money you need in emergency savings is pretty simple. You can use an emergency fund calculator to figure out what your essential monthly expenses total and then multiply that number by anywhere from three to six, depending on how much protection you want.
For retirees, calculating the amount needed for emergency savings may seem a little trickier at first glance. A big reason to have emergency savings is to replace a few months of income. But since many retirees don’t work, they shouldn’t, in theory, need to replace income because they’re not collecting a paycheck.
If you’re retired and want to make sure you have adequate emergency savings, it’s important to figure out what your monthly expenses are. Because believe it or not, the rules for emergency savings actually aren’t all that different for retirees than they are for those who still work.
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It’s all about financial protection
To some degree, retirees may be more protected from financial emergencies than workers are. The reason? Someone who works could get laid off and lose all of their income for months (since not everyone is eligible for unemployment). But a retiree who mostly lives on Social Security is guaranteed to receive those monthly benefits for life.
But there’s a flipside to that. Because so many seniors rely heavily on Social Security, many are limited to a fixed income that can’t support surprise expenses. For these individuals, having money in the bank is crucial. In fact, it’s a good idea for retirees to have three to six months’ worth of bills on hand just for peace of mind.
Now, if you’re retired and living on Social Security and IRA withdrawals, you may be wondering if your retirement plan can take the place of an emergency fund. And the answer is that while it can, it really shouldn’t.
It’s true that you can take a larger IRA withdrawal to cover an unplanned bill. But if your IRA is invested in stocks and bonds (which it should be), and you run into a surprise expense at a time when your investments are down, you could end up taking losses in your account. On the other hand, if you can use money from your emergency savings, you won’t have to take losses in your IRA. Rather, you can withdraw the amount you need and leave your investments alone.
Give yourself peace of mind
Having an emergency fund is important whether you’re working or retired. There’s some wiggle room as to how much you need to save, but the more money you sock away, the more peace of mind you might enjoy.