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Even if you're cautious, costly emergencies can happen at any stage of life — including your retirement. But that doesn't mean you can't be financially prepared for the unexpected. That's why building an emergency fund in retirement could be a smart idea.
In fact, having an adequate contingency fund might be even more important when you're retired. Bouncing back from a large unplanned expenditure may be harder after you've stopped working, especially if going back to work isn't a realistic option. Also, in the case of a health-related emergency, physical recovery may take longer in later years and could therefore cost more. Here's why you may want an emergency fund for retirement and how to start saving.
Potential Uses for an Emergency Fund in Retirement
There are a number of possible expenditures for which an emergency fund in retirement could be useful. Here are just a few examples:
- Health care: You may need to tap into your savings to pay off any unexpected expenses that aren't fully covered by insurance, including Medicare. For instance, Medicare generally doesn't cover dental procedures, which can be costly.
- Home expenses: If you own a home, you may have unexpected expenses such as the need to replace or upgrade a necessary appliance. If you have damage to your home that's caused by a storm, you may have to pay a high deductible, depending on your home insurance.
- Transportation: If your car suddenly goes out of commission, you may need to buy a new one or find alternative temporary transportation, which can be expensive.
How Much Should You Save?
When deciding how much to save in your emergency fund, the process is similar to deciding what your overall retirement savings should be. Finding the right number depends upon your personal financial profile and your lifestyle. If, for example, you own liquid assets, such as stocks, that you could sell in an emergency, that could reduce the required size of your emergency fund. However, the general rule of thumb of putting aside enough money to cover three to six months of expenses may be a good place to start. If you're unsure how much to have in your emergency fund, consider seeking guidance from a financial professional.
How to Start Saving
Finally, how should you accumulate the dollars you need for your emergency fund? You have several options to consider. First, you could simply put a plan in place to set money aside and use a high-interest savings account at your preferred bank. You might also consider opening an account that offers compounding interest, or opening a retirement savings account such as an individual retirement account (IRA) in addition to a 401(k), if you haven't reached your contribution limit for the year. Again, it's important to remember that no investment type is guaranteed to grow or hold its current value, and past performance doesn't ensure future results.
Consider consulting with a qualified financial professional on all of the emergency fund options, as each strategy has its benefits and conditions. Whatever path you choose, the sooner you get started, the more likely you are to reach your goal.