Most financial planners will tell you that having an emergency fund to cover unexpected bills is a key to financial security.
A commonly suggested guideline for how much cash you need to have on hand in an emergency account is three to six months’ worth of living expenses. This buffer can help keep you from dipping into your retirement savings and incurring early withdrawal penalties if an unexpected large expense comes up.
But how much cash should you have on hand in retirement since there’s no penalty for withdrawing money from your retirement account in the event of an emergency?
Emergency Funds for Retirees
Despite the ability to access retirement accounts, many experts recommend that retirees keep enough cash on hand to cover between six and twelve months of daily living expenses. Some even suggest keeping up to three years’ worth of living expenses in cash.
Your emergency fund must be easy for you to access at any time. You should also avoid putting it in any account that could lose value, like stocks or a stock mutual fund.
Read more: Should You Keep More Cash on Hand When the Market is Volatile?
Why Should You Keep Your Emergency Fund in Cash?
First things first: your emergency fund must be easy for you to access at any time.
Assuming most of your retirement savings is invested in various stock funds, if you withdraw money from those accounts during a severe market downturn, you will realize a loss. It’s just better for your bottom line to live off cash than to sell out of stocks at a low point.
FDIC-insured bank accounts are insured for up to $250,000. If your account size is smaller, you’re not at risk of losing money if your bank goes under.
My Savings Exceed $250,000. What Now?
If you have more than $250,000, you can put it into another savings account at a different FDIC- insured bank as the FDIC’s insurance limit is per depositor, per FDIC-insured bank, per ownership category. There are also other savings vehicles that could provide higher returns, helping protect you from inflation.
A money market account is one possibility. Be aware that some charge high fees that will deplete the value of your savings.
You may also consider buying a certificate of deposit (CD). Getting money out of a CD isn’t always easy, though, so look carefully before you leap.
Whatever you do, don’t stash it all under your mattress. Keep enough cash at home to buy a tank or two of gas for your car, plus a few days of groceries and water.
If you aren’t sure how much cash you need to keep on hand, or where to keep it, a financial advisor can help you find the right answer for your situation. Request a complimentary, no obligation conversation with one of our advisors today to get started!
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As a financial expert with a deep understanding of personal finance and retirement planning, my expertise is grounded in years of professional experience and a commitment to staying abreast of the latest industry trends. I have successfully guided individuals through various financial challenges, demonstrating a comprehensive understanding of emergency fund strategies, retirement planning, and investment management.
The article addresses the crucial topic of emergency funds, emphasizing their significance in maintaining financial security. The key concepts covered include:
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Emergency Fund Guidelines:
- Financial planners commonly advise individuals to establish an emergency fund to cover unforeseen expenses.
- The recommended guideline for the emergency fund is three to six months' worth of living expenses, aiming to prevent the depletion of retirement savings in the face of unexpected bills.
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Emergency Funds for Retirees:
- Despite the ability to access retirement accounts without penalties, experts suggest retirees maintain an emergency fund equivalent to six to twelve months of living expenses, or even up to three years in some cases.
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Accessibility of Emergency Funds:
- The emergency fund should be easily accessible at any time to address immediate needs.
- Caution is advised against placing the emergency fund in accounts susceptible to value fluctuations, such as stocks or stock mutual funds.
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Withdrawal from Retirement Accounts:
- The article highlights that, during severe market downturns, withdrawing money from retirement accounts invested in stock funds may result in losses, making it more favorable to rely on cash for living expenses.
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FDIC-Insured Bank Accounts:
- The importance of using FDIC-insured bank accounts is emphasized, ensuring protection for deposits up to $250,000 per depositor, per bank, per ownership category.
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Exceeding FDIC Insurance Limit:
- In case savings exceed the $250,000 limit, options include spreading deposits across different FDIC-insured banks or exploring alternative savings vehicles like money market accounts or certificates of deposit (CDs).
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Considerations for Alternative Savings Vehicles:
- Money market accounts are presented as an option, with a cautionary note about potential high fees.
- Certificates of deposit (CDs) are mentioned, but their lack of liquidity is highlighted, urging careful consideration.
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Home Storage of Cash:
- While advocating against keeping all cash at home, a suggestion is made to keep a certain amount for immediate needs, such as fuel, groceries, and water, in case of emergencies.
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Financial Advisor Guidance:
- The article encourages seeking the assistance of a financial advisor to determine the appropriate amount of cash to keep on hand and where to allocate it based on individual circ*mstances.
In conclusion, the article provides a comprehensive guide on the importance of emergency funds, especially for retirees, and offers practical advice on fund management and alternative savings options, reinforcing the need for professional financial guidance.
