Financial Planner Reveals How Much Money Soon-to-be Retirees Should Have In Emergency Funds

People save in emergency funds to overcome unexpected expenses like medical bills and home repairs or to stay afloat during job losses. However, high borrowing and living costs, relatively muted wage growth, job losses, and lower-than-expected job openings have severely strained US household budgets. The mounting pressure to accommodate rising costs has stunted Americans' ability to save in emergency funds. A 2024 Empower survey of over 1,100 US adults revealed that over 20% had no emergency savings, while 37% couldn't afford an emergency expense of $400, primarily due to high-interest credit card debt, elevated inflation, and subsequent price increases for diverse essential products.

However, emergency funds might be a low priority for those nearing retirement, as they could be more focused on planning for 401(k) and Social Security withdrawals. While financial experts generally recommend maintaining an emergency fund sufficient to cover three to six months of expenses, Mamie Wheaton, a certified financial planner and the director of financial planning at LearnLux, explained in an Insider post that the emergency fund savings estimate changes in retirement. She recommends that soon-to-be retirees build an emergency fund covering 12 months of expenses. An individual might overcome financial difficulties with a smaller emergency fund during their working years, but higher liquid savings for unexpected bills mean more security in retirement.

"I would generally recommend around 12 months of liquid expenses on hand for retirees or someone who is just about to go into retirement," Wheaton said. She stressed that the cash in emergency funds should be easily accessible and shouldn't be linked to any retirement or investment plan. While 12 months of savings is much bigger than most people aim for while contributing to their emergency funds, Wheaton believes one can go beyond that estimate because "everyone has a comfort level on the amount of cash they want to hold."

Emergency Funds Can Have New Uses In Retirement

Unlike current US workers, retirees may face new situations in which they are required to tap into their emergency funds. Wheaton said it might make sense for retirees to dip into their emergency funds rather than withdraw from their retirement plans during a market downturn, which can markedly shrink the value of their assets like investments in 401(k) and IRA funds. "If you have a lot of your retirement investments in securities, that's where you would probably want a little bit more of a cash buffer so that you don't have to pull from those accounts in the event of a market downturn," she explained. "You can let it recover."

Medical expenses also become a big part of your retirement planning. Medical bills not covered by Medicare or private insurance policies could translate to out-of-pocket costs. "They should prepare for higher health costs, things like mobility issues. You don't really think about that, but a lot of times, that's not always covered. When a mobility issue comes up, you'll have to pay out of pocket for it," Wheaton noted, adding that's where an emergency fund can work for you. You might be able to avoid loans and unplanned retirement withdrawals for these bills if you have a larger-than-usual emergency fund.

Overall, she suggests that emergency funds should ideally be large enough to protect your savings in retirement accounts since making large withdrawals from your 401(k) and similar accounts can have long-term negative consequences in retirement. Every time you avoid breaking your egg nest for unexpected costs, you offer your decades of hard-earned money a chance to continue growing with the power of compounding interest while making space for yourself to replenish the emergency fund you used to clear urgent bills.