Chances are, you’ve heard that you need an emergency fund large enough to cover living expenses for three to six months. Having money in an emergency savings account can help you cover unexpected expenses or cope with reduced income from losing your job.
However, sometimes people assume that after retirement they will no longer need it because they don’t have to worry about losing their job.
However, the reality is that it is equally (if not more) important for older people to have extraordinary savings after leaving the working world. There are several main reasons for this.
Why retirees still need an emergency fund
Unfortunately, as you get older, emergencies don’t just happen. While you no longer run the risk of losing your job, resulting in a disruption to your income, there is still a good chance that you will face unexpected expenses.
In fact, the chances of unexpected expenses may be even higher than when you were younger. This is because you are getting old and your health may deteriorate. Plus, your home can age with you, so you may be more likely to need expensive renovations.
1. You cannot count on earned income.
If these extra expenses happen in retirement, you may have less financial capacity than you did when you were working. For example, you can’t just pick up a few extra hours at work to cover costs. So, if you don’t have a reserve fund, your only option may be to either withdraw the money from the pension fund or borrow it. And none of the options are successful.
2. Avoid the risks of withdrawing funds to a retirement account.
If you are forced to take an unanticipated distribution from your retirement account to cover emergency expenses, this could affect your ability to maintain a safe withdrawal rate. This could put you at greater risk of running out of money in the future because you emptied your account too quickly.
3. Avoid tax implications.
You may also face the tax implications of an unexpected distribution, as you will be taxed at your normal rate when you withdraw funds from retirement plans (unless you are withdrawing money from your Roth account). An increase in income can sometimes even push you into a higher tax tier and / or partially tax social security benefits.
4. Don’t go into debt.
Going into debt is also not ideal for seniors if you have a fixed income, as you will be adding a new monthly bill to your obligations. This could mean you will need to withdraw more from your retirement funds later to pay those monthly bills or cut costs elsewhere (even if you don’t have a lot of wiggle room in your budget). You will have less time and less opportunity to bounce back from such financial setbacks as you get older and stop getting paid.
Because of these problems, having a reserve fund is critical in later years. If you still don’t have enough money to cover your living expenses for several months, try to put contingency savings into your budget as soon as possible to prepare for the smoothest retirement.
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