Emergency Funds in Retirement

I have always thought of emergency funds as a vital part of one’s finances.  You want to be able to pay the bills in the event of a loss of income or revenue stream, when your expenses exceed whatever you have.  One thing you don’t want to do is lose money, as it’s harder to make up losses than might meet the eye.

Having said that, I always thought about emergency funds in the context of a person or family relying on income from current employment – not someone who is in the retirement phase of life.  An article at Yahoo! Finance brought up this topic, and it piqued my interest in considering why one would need emergency funds when retired.

The key reasons given were:

  1. Unanticipated expenses
  2. Inflation
  3. Market Fluctuation

Now, after reading this article, I have revisited my thinking on emergency funds at different times of life. For me, an emergency fund for a working person is to make sure that person and his or her family would be covered in the event of job loss or other disruption in income stream. Even if such people have money specifically allocated for retirement, it can be kept separate from funds designated as for emergencies. In terms of amount, I think that 12 months is a good number, rather than the six month figure mentioned in the article. People out of work can remain out of work for a long time these days.

For those truly retired, there is no reason to worry about job loss. They are retired! To my way of thinking, retired means that you are done working; if you do work, it’s not for income that you are actually counting on. If that were the case, you would not be retired. Additionally, in terms of income streams in retirement, one probably doesn’t want to take on risk in terms of potential variability anyway. Social Security or Pensions don’t necessarily add a variable component.

In terms of the unanticipated expenses, inflation, and market fluctuation – shouldn’t these be taken into account when planning for retirement anyway? Sure, a larger percentage of assets for retirees will likely be in lower risk vehicles such as cash. So why should additional cash or liquid cash equivalents be deemed to be part of an “emergency fund”?

Again, I think it’s just a matter of asset allocation in a retirement portfolio, which should ideally be set up to provide for retirement needs while taking into account such circumstances as noted in the article.

Bottom line: I think that “emergency funds” are necessary for people who haven’t yet reached retirement, but are not a specific, stand-alone entity in retirement.

I realize than many people may see it differently. What do you think?


  1. says

    Very interesting article! It definitely got me thinking about my own finances and what I would do in retirement. I am in agreement with you that an emergency fund should not be as vital of a priority to save for during retirement. This is due to my thinking that in theory, this planning should have already been accounted for before retiring. For example, I would want to have a reliable income stream each month already coming in to cover my expenses.

    Have you ever investigated variable annuities? I am thinking that would be a viable option.

    • Squirrelers says

      MPF Journey – That’s how I see it. A reilable income stream each month coming in. Variable Annuities can be a vehicle for just what we are talking about, and you read my mind. I’m planning to get a more complete handle on pros/cons of the commonly available approaches, as I conceptually see these as having very practical application this approach to funding retirement expenses.

  2. says

    We are planning to have enough saved for retirement so that we could live mainly off the interest. But, if the market crashes again in 25 years, we may go back to 2-3% interest rates and be forced to use some principal if we don’t have cash on hand to cover our shortfall. That’s why we plan on having a 1-2 year emergency fund at all times during retirement. I would never want to be forced to “sell”…I like the control that emergency funds provide. :-)

  3. says

    I think a great deal needs to be done to break down this “emergency fund” dogma. Why someone who’s retired, probably has paid off their mortgage and as very low fixed expenses needs an emergency fund is beyond me

  4. says

    If you have a huge expense in a given month and are “truly” retired, you may have to touch your principle if your monthly income doesn’t cover that expense. The problem is people are unlikely to want to unplug those investments and may end up in debt as a result.

  5. says

    I think for many retirees, health care costs are the biggest unplanned expense.

    The way we buffer with my mom is by buying supplemental health insurance through Blue Cross. It covers most of the difference between what Social Security pays in health costs. Many procedures only are covered 80% and one surgery can break the bank.

    It’s not a cheap option, but it’s our way of level loading her health care costs. It’s a lot easier to plan $140/month vs a few grand all at once.

    • Squirrelers says

      Sandy – I can certainly understand. I had read somewhere (wish I could remember where) that 1/2 of one’s lifetime medical expenses are in the final 2 years of life. That jumped out at me as a real wake up call.

  6. says

    I tend to agree with what you’ve said on this subject. In my mind my emergency fund is designed to cover the biggest emergency which I see to be job loss. Once you’re retired you really don’t have that to be concerned about. I do think that having a nice pile of cash on the side is nice because it gives you some added flexibility. Depending on how your retirement is set up, you may not always have access to all of your funds instantly in the event of an emergency.

    In the end I think it’s also important that emergency funds are your safety blanket, so whatever makes me feel comfortable is important. Even if it means that you have a “redundant” pile of cash sitting on the side not really doing much.

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