Here’s How Much Retirees Should Keep in an Emergency Fund

No matter how much wealth you’ve accumulated, an emergency fund is vital at every stage in your life. For retirees, this advice is especially important. You want to enjoy your retirement , not spend it worried about running out of funds or going into debt.

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“While saving adequately for retirement is crucial, an emergency fund ensures income stability no matter what comes — health issues, home repairs or market drops,” said Marty Burbank, elder law attorney and owner of OC Elder Law . “Retirees can’t predict future costs or market changes, but an emergency fund helps ensure financial security to fully enjoy retirement.”

According to Abid Salahi, finance expert and co-founder of FinlyWealth , the amount retirees should keep in an emergency fund differs significantly from the typical advice given to working individuals. “While the standard recommendation for workers is 3 to 6 months of expenses, retirees often need a larger cushion due to their unique financial situation,” he said.

Salahi recommended retirees aim to keep 12 to 18 months of living expenses in their emergency fund. “This larger buffer is crucial for several reasons. First, retirees don’t have the option of increasing their income through overtime or side gigs like working individuals do. Second, unexpected healthcare costs tend to rise as we age, potentially leading to larger emergency expenses.”

All of that said, here is a breakdown of factors retirees should consider when determining their emergency fund size .

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Healthcare Costs

According to Salahi, medical emergencies can be more frequent and costly for retirees. “I advise my clients to add an extra 3 to 6 months of expenses to their emergency fund, specifically for potential healthcare needs.”

This could cover unexpected out-of-pocket costs or gaps in Medicare coverage.

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Market Volatility

Retirees relying on investment income need to protect against market downturns, Salahi explained. A larger emergency fund allows them to avoid selling investments at a loss during market dips.

“For retirees with a significant portion of their income from investments, I recommend increasing their emergency fund to 24 months of expenses.”

Burbank agreed.

“I advise retirees to keep 18 to 24 months of essential living expenses in an emergency fund. In retirement, health issues arise unexpectedly and markets fluctuate, impacting income and savings,” he explained. “An emergency fund provides security so retirees can avoid withdrawing money from accounts during market downturns, allowing time for recovery.”

Home and Auto Repairs

“Older homes and vehicles often require more maintenance,” Salahi noted.

Because of this, he recommended retirees should add 1% to 2% of their home’s value and $1,000 to $2,000 per vehicle to their emergency fund annually to cover potential major repairs.

Inflation Considerations

Salahi explained that with potentially decades in retirement, inflation can significantly impact purchasing power. “Retirees should increase their emergency fund by 2% to 3% annually to keep pace with average inflation rates.”

Income Sources

According to Salahi, retirees with guaranteed income sources like pensions or annuities may need less in their emergency fund. Those relying heavily on variable sources like investment withdrawals, however, should aim for the higher end of the 12 to 18 month range.

Lifestyle Factors

According to Salahi, retirees with plans for extensive travel or expensive hobbies should add an extra 10% to 15% to their emergency fund to cover unexpected costs related to these activities. For example, unexpected illness when traveling can easily add up in costs.

The Bottom Line

Experts add that it’s crucial for a retiree’s emergency fund to be separate from retirement accounts to avoid early withdrawal penalties. “I recommend keeping it in a high-yield savings account or a ladder of short-term CDs for easy access and some interest earnings,” said Salahi.

Regularly reassessing the emergency fund is equally vital.

Salahi said, “Retirees should review their emergency fund annually, adjusting for changes in expenses, health status, and overall financial situation. This ensures the fund remains adequate throughout retirement.”

By maintaining a robust emergency fund, retirees can navigate unexpected expenses without derailing their long-term financial plans, providing peace of mind and financial stability throughout their golden years.

This article originally appeared on GOBankingRates.com : Here’s How Much Retirees Should Keep in an Emergency Fund