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- If you're retiring soon, make sure your emergency fund is in good shape.
- A financial advisor recommends keeping enough savings to cover 12 months of living costs once you stop working.
- Should the market drop or if unforeseen medical costs arise and you require immediate funding, you will have a safety net.
If you're planning to retire soon, there are a lot of money items on your mind. One thing you might not be thinking about, though, is your emergency fund .
An emergency fund is a straightforward yet essential component: It’s a dedicated savings account meant solely for unforeseen costs. Typically, experts in finance suggest maintaining funds equivalent to three to six months’ worth of living expenses in this reserve.
However, in retirement, that shifts according to one financial advisor.
Maintain a bigger emergency reserve for your retirement—aim for around one year’s worth of living costs.
While you could get away with a smaller emergency fund while you were working, you'll want a larger one in retirement.
Financial planner Mamie Wheaton of LearnLux says that having the extra cash will mean extra security. "I would generally recommend around 12 months of liquid expenses on hand for retirees or someone who is just about to go into retirement," she said.
When Wheaton refers to liquid savings, she is talking about funds that aren’t locked into investment vehicles within a retirement portfolio. Rather, emergency savings ought to be kept in readily available accounts such as a high-yield savings account There, it will keep accruing a modest amount of interest while awaiting use.
That exceeds the size of a typical emergency fund. Nevertheless, she mentions that 12 months is not necessarily the upper limit. She stated, "Individuals have their own preferences regarding how much cash they feel comfortable keeping." Maintaining an additional cushion for added peace of mind might not be such a bad notion after all.
Not sure how to begin? Think about consulting a financial advisor.
Finding a financial advisor It doesn’t have to be complicated. With SmartAsset’s free tool, you can connect with up to three fiduciary financial advisors serving your locality within minutes. These advisors have undergone scrutiny from SmartAsset and adhere to a fiduciary standard, ensuring they prioritize your best interests. Start your search now.
Utilize your emergency savings when facing a market decline or unforeseen costs.
Many uses for your emergency fund include covering home maintenance issues or unforeseen expenses. However, during retirement, several additional scenarios permit you to safely tap into this reserve.
One situation is when it doesn't make sense to withdraw funds from your account. retirement plans If the market declines and your portfolio decreases in value, you could use your emergency savings rather than touching your retirement fund, according to Wheaton.
If a significant portion of your retirement funds is invested in securities, it might be wise to maintain an additional cash reserve. This way, you avoid needing to withdraw money from these accounts during a market decline," she explained. "This allows them time to rebound.
Besides ensuring you have funds available to manage your costs should the market decline, maintaining an ample emergency reserve during retirement can also assist with unexpected medical needs and expenditures. Since certain expenses might not be reimbursed by Medicare or personal insurance policies, these may end up being your responsibility—and thus, they would draw from your emergency savings.
"They ought to get ready for increased healthcare expenses, including problems related to mobility. Such concerns often go unnoticed, yet they frequently aren’t covered by insurance. Should a mobility issue arise, you would likely face unexpected out-of-pocket payments," she stated. This is precisely when an emergency savings account becomes invaluable.
Your emergency fund should be larger to protect your retirement account, Wheaton said. "You generally don't want to pull large sums of money from retirement accounts at one time. If you do have an emergency or a medical expense you have to pay for, it's nice to pull it out of your emergency fund, as opposed to pulling it from your retirement account."
That way, your retirement money will continue growing and be there when you need it, while your emergency fund will help to make sure the unexpected is covered, too.
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