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By Mary Kane, Kiplinger
You may think of an emergency fund as the cash stash to keep
when you are working, with employees typically advised to save six
months’ worth of living expenses in the event of a job loss or other
income shortfall. But retirees may need emergency funds, too, even if
savings cover basic living expenses.
Unanticipated costs can upend your careful financial planning: a
broken furnace, a leaky roof and other maintenance on a house.
Thousands of dollars in dental work for implants or other oral health
problems, which traditional Medicare doesn’t cover. Adult children or
other family members who need financial help.
Even natural disasters could sideswipe you. In Austin, Tex.,
financial planner Bradley Phillips says that some of his older clients
with second homes endured a series of floods recently and now face
expensive rebuilding requirements not covered by insurance. “There are
things that are going to happen that you just can’t foresee,” he says.
If all your money is tied up in tax-deferred retirement
accounts, you’ll get hit with a tax bill if you dig into that money for
an emergency. But creating an emergency fund takes some planning. You
don’t want to set aside too much cash and lose out on the opportunity to
keep it invested for the long term.
How to Build an Emergency Fund for Retirement
It's not too late to start building an emergency fund, even if
you are near or in retirement. Use any tax refunds, bonuses if you are
still working, or extra money from a part-time or side gig, says Elyse
Foster, a financial planner with Harbor Wealth Management, in Boulder,
Colo.
Depending on your current cash allocation, you also might use
required minimum distributions to build your emergency fund. Financial
planner Jane Evelyn, age 73, of Kennebunkport, Me., uses this approach
and advises clients to do the same. “A lot of things do not change in
retirement, and that includes the occasional need for extra funds for
the unexpected,” Evelyn says.
Work with cash you already have on hand, says financial planner
Dave O’Brien, principal at Evolution Advisers, in Richmond, Va. Put that
money into an account at a bank or credit union with a competitive
interest rate to establish a “cash bucket” to help cover any emergency
needs. You could refill the bucket occasionally at your discretion—when
it’s getting low and when your investment account is relatively high.
When trying to figure out how much to set aside for emergency
use, consider replacement costs of big-ticket items, such as appliances,
and estimate amounts for unexpected events, such as car repairs. The
amount you set aside for emergencies should be in addition to your cash
stash that covers regular living expenses. (Many experts suggest
retirees should have a cash cushion of three to five years’ worth of
living expenses to cover their regular bills.)
Even retirees with plenty of cash on hand panic at the idea of
unexpected bills, says Rand Spero, president of financial-planning firm
Street Smart Financial, in Lexington, Mass. “I call it a rainy-day fund
or a life-preserver fund instead,” he says.
If you are still working, address expensive projects before you
retire. Replace a roof or furnace now, if you know it’s needed soon. If
you handle home maintenance yourself, consider that as you age you might
have to start paying someone to clean your gutters or do other repair
jobs. Retirees often don’t include those costs in their retirement
planning, Phillips says.
If you’d rather not set up a separate emergency fund, you can
use reserves in your investment portfolio for unexpected costs, says
Eric Ross, principal with Truepoint Wealth Counsel, in Cincinnati, Ohio.
But be careful what part of your portfolio you tap. For example, he
says, consider tapping short-term, high-quality bond funds, which “can
be liquidated without worrying about meaningful changes in market price
or capital gains.”
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