Key Points
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Figure out what your monthly expenses look like.
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Decide how much months or years of protection you want.
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Factor in upcoming costs that could catch you off-guard.
During your working years, it’s important to have an emergency fund in case you lose your job or end up with a large expense your regular paycheck can’t handle. In retirement, you don’t necessarily need an emergency fund to replace a lost paycheck, since you’re no longer collecting one. But you do need enough cash on hand to protect yourself financially.
Here’s how to figure out what your emergency fund should look like in retirement.
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1. Determine your monthly expenses
The first step in figuring out how much emergency cash you need is to see what your monthly bills amount to and how much of that Social Security covers.
Since those monthly benefits can’t go away and are guaranteed for life, you don’t necessarily need to save enough to take their place. You just need to save enough to cover whatever portion of your expenses Social Security doesn’t cover.
2. Figure out how much protection you want
Working folks are often advised to sock away three to six months’ worth of living expenses in an emergency fund, since it can easily take that long to find a job after becoming unemployed. In retirement, you might think you need fewer months of savings. In reality, you should have more.
Your emergency fund should make it possible to leave your investment portfolio alone during a market downturn. And it’s hard to know how long one of those might last. You may want to aim for 12 to 36 months’ worth of expenses in your emergency fund, depending on how much protection you feel you need.
3. Pad that number to account for lurking one-off expenses
You may have an aging furnace at home, a spotty air conditioning system, or a transmission in your car that’s seen better days. If you’re socking away cash, you might as well account for lurking expenses you think might come to a head at some point in the not-so-distant future.
Putting it all together
To see what a real-world emergency fund for retirees might look like, let’s say you spend $4,000 a month and Social Security pays you $2,500 a month. That means you need $1,500 to cover your remaining bills.
If you decide you’re comfortable with two years’ worth of expenses in cash, that means you’ll want $36,000. If you also have several aging systems at home that may need to be replaced imminently, you may decide to pad that number by $5,000 to $10,000 (or more).
Ultimately, building a retirement emergency fund is about giving yourself the flexibility to preserve your savings without having to upend your lifestyle. It could be just the thing that gives you peace of mind, even if you no longer have a paycheck from a job you rely on.
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