I’m a Financial Advisor: Here’s Why Retirees Should Have an Emergency Fund
You’ve worked hard, saved diligently and are considering retirement. You’re already ahead of the game because you can rely on your savings as you plan a future with more leisure time. Whether you’re dreaming of travel or looking forward to volunteering, consider maintaining an emergency fund. This is a fund separate from the retirement savings you’ve accrued through one job or set aside over the years across various jobs.
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“Since emergency funds are earmarked for unexpected or unintimated events, one must recognize that when someone transitions to a fixed income and a potentially more predictable budget, the ability to earn isn’t readily available,” said Dr. Nicole B. Simpson, a certified financial planner.
An emergency fund mitigates the impact of the unexpected, helping retirees maintain their standard of living.
Emergency funds are ideally tied to secure, stable and liquid investments with guaranteed returns and little to no risk. Such investments often include money market accounts and certificates of deposit (CDs), which comprise the most secure tier of a diversified investment portfolio. Following this, short-term bonds can offer slightly higher yields with prompt maturity dates. Stocks represent a higher-risk category and can make up a smaller or larger portion of a portfolio, depending on an individual’s life stage and risk tolerance. It is crucial to consult a qualified financial advisor when planning for retirement to ensure your investments are aligned with your financial goals and retirement timeline.
An important thing to remember when making your financial retirement plans is to factor in the unexpected — in this case, financial instability — so you can enjoy your golden years.
“While many people think about emergency funds covering them in a job loss, they are about so much more,” said Jay Zigmont, PhD, CFP, founder of Childfree Wealth. “Retirees often have a fixed income, which means they have less flexibility in their budget. With less flexibility comes less ability to handle emergencies. A retiree’s emergency fund can help with unplanned medical expenses, car expenses, house maintenance, and more.”
Unexpected Medical Expenses
Whether you have Medicare, private insurance or both, retirees may encounter significant out-of-pocket expenses for prescription medications or medical procedures. If long-term care is needed, it may not be fully covered by the insurance you have. Medicare Part A is commonly thought of as hospital insurance, but it’s important to understand what it does and does not cover. In addition to reading about it, check with your health insurance provider or agent to understand the limitations of your long-term care coverage so that you are prepared financially.
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Household Expenses
An unexpected breakdown of household essentials, like a leaky roof or a trusty refrigerator that’s served you well for 15 years, can be costly. With an emergency fund, you can fix or replace necessary issues and leave your retirement savings untouched.
Financial Help for Family
Retirees can find themselves in a position to financially assist family members during emergencies. This could be helping an adult child who has unexpectedly lost their job and is struggling with their child’s college expenses or assisting a sibling facing a health crisis.
Automobile Repair or Replacement
Retirees might find themselves driving a lot less — or a lot more, depending on their leisure-time plans. Either way, unforeseen vehicle-related costs can arise. Whether it’s an accident, a repair or a desire for an upgrade to a more comfortable, luxury vehicle, an emergency fund can help keep your retirement savings intact for the plans you’ve made.
Income Fluctuations
Retirees sometimes rely on variable income sources like investments or rental income. In those cases, an emergency fund offers stability during periods of decreased investment returns and market volatility.
Inflation
Inflation affects the cost of living. This impacts a retiree’s budget and can be especially hard on fixed-income retirees. An emergency fund allows you to absorb the impact of inflation on your daily living expenses.
Travel
This is not the luxury cruise you planned for. Emergencies that require immediate travel, such as a family or close friend’s illness or funeral, can arise suddenly. The cost of last-minute travel is high and a good reason to use money set aside in an emergency fund separate from your savings.
Taxes
“In this world, nothing can be said to be certain except death and taxes.” This famous quote attributed to Benjamin Franklin is as true today, as ever. In the United States, our taxes are used for public services, like unemployment benefits and fire departments, as well as for environmental programs and funding research in fields like health and technology.
So, taxes are here to stay. When unexpected tax liabilities occur, an emergency fund can help cover the costs without the need to liquidate savings or investments.
Additionally, Dr. Simpson cautions retirees to consider that “relying upon tapping into retirement assets can impact the family’s tax liability once they are on fixed income. For example, based on a retiree’s monthly projected income, a withdrawal of even $10,000-$15,000 to handle an emergency can push the retiree into a new tax bracket, causing a domino effect of added expenditures.”
In a nutshell, an emergency fund is a hedge against the unexpected. An emergency fund in retirement preserves financial security and independence by helping retirees cover unanticipated expenses, which means peace of mind.
Nicole Spector contributed to this article.
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