How Much Emergency Savings Do Retirees Need?


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Regardless of your age, it is wise to have money in a savings account for unforeseen expenses. In fact, most people are advised to save enough money to cover three to six months of living expenses. The logic is that having so much cash on hand could get you through a period of reduced income or could be used to cover an unforeseen bill, like a major home repair.

If you’re still working, deciding how much money you need in emergency savings is fairly straightforward. You can use a emergency fund calculator to figure out your total essential monthly expenses, then multiply that number by 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 aren’t working, in theory they shouldn’t need to replace their income because they don’t collect a paycheck.

If you’re retired and want to make sure you have enough emergency savings, it’s important to figure out what your monthly expenses are. Because believe it or not, the rules for emergency savings are actually not that different for retirees than for those who are still working.

It’s all about financial protection

To some extent, retirees may be better protected against financial emergencies than workers. The reason? A person who works could be made redundant and lose all their income for months (because not everyone is entitled to unemployment). But a retiree who lives primarily on Social Security is guaranteed to receive these monthly benefits for life.

But there is a flip side to this. Because so many older people rely heavily on Social Security, many are limited to a fixed income that cannot afford unexpected expenses. For these people, having money in the bank is crucial. In fact, it’s a good idea for retirees to have three to six months 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 replace an emergency fund. And the answer is, while it is possible, it really shouldn’t be.

It is true that you can make a larger IRA withdrawal to cover an unexpected bill. But if your IRA is invested in stocks and bonds (which it should be) and you face a surprise expense when your investments are down, you could end up suffering losses on your account. On the flip side, if you can use your emergency savings money, you won’t have to incur losses in your IRA. On the contrary, you can withdraw the amount you need and leave your investments alone.

Give yourself peace of mind

It is important to have an emergency fund whether you are working or retired. There is some wiggle room as to how much you need to save, but the more money you save, the more peace of mind you can enjoy.

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