You’ve probably been told several times throughout your life that it’s important to have an emergency fund; most financial advisors recommend that you have 3-6 months of living expenses in an account that you can easily access.
As you near retirement, you might think that’s not necessary any longer. After all, you’re spending what you’ve saved for retirement – so why would you need an emergency fund?
Protect Your Retirement Income
Emergencies happen whether we are working or retired and for some reason there seem to be even more – and more expensive - emergencies during retirement; health issues arise, and home repairs don’t stop just because you’re no longer working. So while you might not need an emergency fund to replace income like you would during your working years you may need it for larger ticket items.
It's important to remember that the income you’re using in retirement needs to be strategically accessed to limit your tax bill. This means that dipping into your retirement accounts for emergencies might cost you more in the long run.
For example, sometimes retirees confuse their emergency funds with their IRA. The problem with doing that is every time they pull from their IRA for an emergency, they are triggering a taxable event - in other words, an additional expense.
Also, when the markets are down, tapping into your long-term investments is even worse than usual because you are selling low. Ideally with long-term investments we want to be strategic about when we sell so as to avoid selling in a down market.
Where to Keep Your Emergency Fund
Just like when you were working, you can keep your emergency fund in a savings account. This makes it easily accessible and doesn’t penalize you when you use it.
An additional tip: Sometimes having it another bank other than your normal bank is helpful so that it isn’t as tempting to tap into for non-emergencies.
Have questions about your retirement plan and how to strategically create an income stream in retirement? Let’s talk about it. CLICK HERE to make an appointment.