You've worked hard, saved diligently, and now you're enjoying your well-earned retirement. But even in retirement, life can throw curveballs. An unexpected home repair, a sudden medical expense, or even a once-in-a-lifetime opportunity can strain your carefully planned budget. That's where an emergency fund comes in. As a financial advisor, building a war chest containing an emergency fund and high-quality short duration bonds in a diversified investment portfolio is something I help my clients with on a regular basis. Let's explore why you need an emergency fund and how to build and maintain it effectively. Why You Need an Emergency Fund in Retirement You might be thinking, "I'm retired. I've already saved. Why do I need an emergency fund?" Here's why:
How Much Should You Have in Your Retirement Emergency Fund? While working, the general rule of thumb is 3-6 months of expenses in an emergency fund. In retirement, you might want to take a different approach: General Guidelines: For those near retirement or in retirement, having approximately 7 years of expenses in high quality, short duration bonds in your investment portfolio will provide a war chest to draw upon. The exact dollar amount that you have saved up is going to be very dependent on your unique situation. Example:
Factors to Consider:
Building Your Emergency Fund: Strategies for Retirees If you're starting from scratch or looking to boost your emergency savings, here are some strategies: 1. Start Small, But Start Now Even small, regular contributions can add up over time. Action Step: Set up an automatic transfer of $50 or $100 per month to your emergency fund. 2. Reassess Your Budget Look for areas where you can trim expenses to redirect money to your emergency fund. Pro Tip: Review subscriptions and memberships. You might find services you no longer use or need. 3. Consider Part-Time Work A part-time job can provide extra income to build your emergency fund while keeping you active and engaged. Idea: Look for flexible, enjoyable work that aligns with your interests and skills. 4. Use Windfalls Wisely Dedicate a portion of any windfalls – like tax refunds or inheritances – to your emergency fund. Rule of Thumb: Consider allocating 50% of windfalls to your emergency fund until you reach your goal. 5. Optimize Your Retirement Account Withdrawals If you're taking required minimum distributions (RMDs), consider setting aside a portion for your emergency fund. Strategy: If your RMD is more than you need for expenses, direct the excess to your taxable brokerage account. Where to Keep Your Emergency Fund Your emergency fund should be easily accessible but not so accessible that you're tempted to dip into it for non-emergencies. Good Options:
Once you've built your emergency fund, maintaining it is crucial. Here's how: 1. Regular Reviews Review your emergency fund at least annually to ensure it still meets your needs. Checklist:
If you dip into your emergency fund, make a plan to replenish it. Strategy: Temporarily reduce discretionary spending or consider taking a larger distribution from retirement accounts (if feasible, but keep in mind tax consequences) to rebuild your fund. 3. Adjust for Inflation The purchasing power of your emergency fund can erode over time due to inflation. Action Step: Increase your emergency fund balance by 2-3% annually to keep pace with inflation. 4. Balance with Other Financial Goals While important, your emergency fund shouldn't come at the expense of other financial priorities. Consider: Balance building your emergency fund with other goals like charitable giving or legacy planning. Tapping Your Emergency Fund: When and How Knowing when to use your emergency fund is as important as having one. Here are some guidelines: Appropriate Uses:
As a Washington state retiree, you have some unique factors to consider:
Ready to build or optimize your retirement emergency fund? Here's your action plan:
Sources:
-Seth Deal
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AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
January 2025
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