What Amount Do Retirees Need in an Emergency Fund?

Senior couple working on their budget at a table at home
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An emergency fund is essential, no matter your age, but not having one can be particularly costly in retirement. Having an emergency fund means that you won't have to tap your IRA, 401(k), or other taxable assets to pay for unexpected expenses. It can also ensure you won't have to go out and get a job.

The key to staying on budget as a retiree is to estimate an adequate amount for your emergency fund. You must also identify the right type of account to hold the money.

Why Do Retirees Need an Emergency Fund?

Emergency funds are meant to be used for unexpected costs, so you don't have to sell off assets or run up debt to cover them. An emergency fund can also be a source of backup cash during your working years. This can be helpful if you lose your job or can't work because of a prolonged illness or temporary disability.

An emergency fund serves additional purposes as you head into retirement.

Protecting Long-Term Investments

Withdrawing money from your investment accounts could mean taking a loss if the market is down. This can happen during a recession. If you have money in emergency savings, you could withdraw that first to give your portfolio time to recover.

Help in Covering Medical Costs

Emergency savings can fill the gaps when it comes to funding health care. Consider the case of a 65-year-old couple retiring in 2020 without employer-provided retiree health coverage. This couple might expect to spend $300,000 on health care, according to Fidelity Investments, and this figure doesn't include long-term care. An accident, unexpected diagnosis, or serious illness could result in medical bills piling up if insurance or Medicare doesn't cover the full cost.

Easing the Loss of a Part-Time Job

If you supplement your income with a part-time job or your spouse is still working, an emergency fund can provide a short-term income source if that job is lost.

Covering Age- or Health-Related Home Improvements

You may need to make changes to your home if you run into mobility issues. You may need to add a ramp, install grab bars in a bathroom, or make hallways and doorways wider. An emergency fund can help you avoid draining your pension, 401(k), or IRA to do so.

How Much Should You Have in an Emergency Fund?

Three to six months of living expenses is the rule of thumb for emergency funds. The amount you may need as a retiree depends on a few other factors:

  • Your monthly retirement income: This includes Social Security benefits, pension payments, regular withdrawals from investment or retirement accounts, and annuity income.
  • How insulated your portfolio is against risk: Keep in mind how your assets are allocated.
  • What you have available in liquid savings: These may be savings accounts, money market accounts, or CDs.

You can approximate a minimum amount for your emergency fund by multiplying your total monthly expenses by the number of months you want to cover. Let's say your goal is to build a 12-month emergency fund, and your monthly expenses are $5,000. That means you'd need $60,000 set aside in an emergency savings account.

What if most of your retirement funds are in cash or other guaranteed investments? This means market downturns would not impact them. You may not need an emergency fund much larger than the recommended three to six months' expenses in this case.

A sizable emergency fund can be a good idea if a large portion of your retirement funds is invested in securities like stocks and bonds. This will help protect you from withdrawing invested funds when the market is down.

Tip

Consider talking to a financial advisor about asset allocation in retirement so that your portfolio is less exposed to risk once you've retired. You should be able to weather market downturns without experiencing significant losses.

Where Should You Keep Your Emergency Fund?

Money in an emergency savings account must be ready and accessible when you need it. And you don't want it to be subject to market volatility, liquidity problems, or withdrawal fees. FDIC-insured (or NCUA-insured) accounts are good choices for these reasons.

High Yield Savings Account

High yield savings accounts offer easy access to your money, and they often earn above-average interest rates on deposits. These accounts can be linked to a checking account for easy transfers. They're available at traditional banks, credit unions, and online banks.

Note

Online banks often pay higher rates to savers than traditional banks do. Still, you may sacrifice branch or ATM access.

Money Market Account

A money market account is something like a savings account. You earn interest on your money, and the funds are easy to access. The difference is that some money market accounts also allow you to write checks. Some may even allow you to withdraw funds using an ATM or debit card.

Note

Savings accounts can often be opened with as little as $1. Money market accounts may require a minimum deposit of hundreds or thousands of dollars to open.

Roth Individual Retirement Account

A Roth IRA can be used for retirement savings. Plus, it can be a good choice to house an emergency fund. As a designated retirement account, you won't pay tax on any earnings within the account, such as interest or dividends. Unlike a traditional IRA or 401(k), you don't have to pay taxes on qualified withdrawals. Contributions can be withdrawn tax- and penalty-free at any time.

Required minimum distributions (RMDs) don't apply during the account owner's lifetime, either. That means there's no need to start taking RMDs at the traditional starting age of 72, or 70½ if you reached age 70½ before January 1, 2020.

Important

A qualified withdrawal is one you make after you reach age 59½. The account must have been open for at least five years.

You can't make additional contributions into a Roth IRA unless you or your spouse are still working or earning income. The annual contribution limit for a couple aged 50 or older with at least one spouse working is $14,000 in 2021 and 2022. This amounts to $6,000 in regular contributions and $1,000 in catch-up contributions for each spouse. You must wait at least five years after opening the Roth to withdraw any earnings without being penalized.

Let's say you're a retiree who already has a Roth IRA at one institution with a broker, and you want to allocate some of those funds for emergency savings with another institution. Perhaps an online bank offers a higher interest rate.

You could transfer an amount from the first Roth into a high-interest savings or money market account in a new Roth IRA at the other institution in this case. Funds that are transferred from one Roth to another are not considered to be new contributions, so they're not subject to the five-year rule. You'd get the higher savings rate at the new bank. And you won't lose the tax benefits of your funds being held in a Roth IRA.

Important

Keep your emergency fund separate from your general retirement funds if you put it in a Roth IRA. It could be held in a money market or a savings account within a Roth. Use it for emergencies only, and be sure you don't invest it in anything that could lose value or be hard to access, such as mutual funds (which can lose value), or an annuity with a surrender period and withdrawal penalties.

Where You Shouldn't Keep Your Emergency Fund

Some accounts aren't meant to give easy and penalty-free access, so they aren't good choices for an emergency fund.

A Certificate of Deposit (CD) Account

A certificate of deposit is subject to an early withdrawal penalty if you take money out before the CD matures. This could eliminate most or all of the interest you earn. It could even cut into your principal in some cases. The same applies to annuities with a surrender period.

Avoid any account in which your funds aren't guaranteed. Any type of security, such as mutual funds, stocks, and bonds, are out of the question, and they can have liquidity issues.

A Traditional IRA

A traditional IRA may not be the best choice for emergency savings either. This is even more true if you're younger than age 59½. You'll pay taxes on the entirety of any amount you withdraw, no matter your age. Making an early withdrawal before age 59½ triggers that additional 10% penalty unless you qualify for an exception, such as total and permanent disability.

Prioritize accounts that guarantee your money, are penalty-free, and are easily accessible.

Key Takeaways

  • Retirees can benefit from having an emergency fund even if they have other assets and income streams.
  • Having three to six months' worth of expenses is a guideline. You may want to adjust this amount to cover higher healthcare costs or increases in living expenses.
  • Emergency funds are best located in savings and deposit accounts that are liquid and easy to access.
  • Using certain retirement assets for emergencies, such as a traditional IRA or 401(k), could lead to tax consequences.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Fidelity. "How to Plan for Rising Health Care Costs."

  2. Internal Revenue Service. "Traditional and Roth IRAs."

  3. Internal Revenue Service. "Publication 590-B (2019), Distributions From Individual Retirement Arrangements (IRAs)."

  4. Internal Revenue Service. "Retirement Topics—IRA Contribution Limits."

  5. Internal Revenue Service. "Income Ranges for Determining IRA Eligibility Change for 2021."

  6. Internal Revenue Service. "Rollover From a Roth IRA."

  7. Internal Revenue Service. "Retirement Topics: Exceptions to Tax on Early Distributions."

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