by Gary Foreman

How does retirement affect your need for a rainy day fund? Find out why you’ll still likely need an emergency fund once you’ve retired and how you’ll manage and use it a bit differently than you do pre-retirement.

An emergency fund is important for everyone. At least that’s what most financial advisors will tell you. And, they’re probably right.

But what about retirees? We’re downsizing and hopefully, have money set aside for retirement. Do we really need an emergency fund once we’ve retired? And, if so, is using and managing that emergency fund in retirement different than pre-retirement?

What’s an Emergency Fund? In Retirement?

Most of us know what an emergency fund is. But let’s go over some basics as they pertain to an emergency fund in retirement.

Define “Emergency”

One definition for emergency is ” a serious, unexpected, and often dangerous situation requiring immediate action.” That probably applies to financial situations, too.

For instance, anything that you can predict isn’t an emergency. So your homeowner’s insurance or annual property tax bill isn’t an emergency. Neither is a refrigerator that needs to be replaced. Why? Because you know that appliances will break eventually. It’s not a matter of ‘if’ they’ll break, but ‘when’ they’ll stop working. So your normal budget should include some money that’s set aside for things like fridges, air conditioners, etc.

Your goal is to only use your emergency fund in true emergencies. For events that could not have been expected and cannot be handled within your normal budget.

Using a Retirement Account as an Emergency Fund

Some would argue that you don’t need an emergency fund when you retire. They suggest that you use your retirement account money as an emergency fund.

An IRA can be used as an emergency fund. Especially if you’re older than 59 1/2. But any money you withdraw will add to your taxable income for the year. And, it won’t be available to earn interest or grow for future use.

And consider this case for using a non-retirement account emergency fund to handle a stock market crash without suffering. Here’s how it works. Unless you have to sell after a crash, it’s just a paper loss. And paper losses disappear when the market rises again. Generally within three or four years.

The danger for retirees is that they count on taking income from their investment accounts every year. Even years after a market crash.

But if their emergency fund is big enough to replace the income that would have come from stock investments, they can afford to wait for the market to recover before selling. To be sure, that would require an emergency fund big enough to cover three or four years of income.

What’s the Purpose of an Emergency Fund in Retirement?

While you’re working, an emergency fund is generally thought to be money that’s available for unexpected large expenses or a sudden loss of income.

In retirement, the emergency fund serves the same purpose. It’s a way to handle large unexpected expenses. It can also protect you if the value of your investments drops.

Some would argue that an emergency fund is mainly to protect you from losing your income (i.e. job) and that since you can’t be fired or laid-off from Social Security an emergency fund isn’t necessary. While that part of the argument is true, it doesn’t take into account the extra expenses that retirees potentially face. In retirement, you may not need to guard against income loss, but you do need to be prepared for unexpected expenses.

What Type of Retirement Expenses Should An Emergency Fund Cover?

A major auto repair bill is a common emergency fund item. Especially if you have an older car.

Uncovered medical expenses. Even with Medicare and a Medicare supplement plan not all your medical expenses will be covered.

“According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.” (source: Fidelity.com)

If you’ve chosen to own your home, you may face major home repairs. Especially if your home is getting older. Most homeowners should set aside 2% or 3% of the home value for repairs each year. If your home is more than 20 years old, you should think more in terms of 4% or even 5% yearly.

And even if you’re in an assisted living facility, you’re not off the hook. You’ll be charged for extra services should you need them. It only takes one fall or medical issue and you’ll be paying for unplanned extra help.

You may want to help adult children and grandchildren face their emergencies. Many young adults are having a hard time getting a financial foothold. Whether because of a lack of financial education, large student loans, or some other reason, adults in their 20s are called the ‘boomerang generation’ for a reason. And, while our kids are often past that point, our grandkids typically are not.

3 Questions To Ask Before Using Your Emergency Fund in Retirement

There are always three questions to ask before dipping into your emergency fund in retirement.

1. Is it truly an emergency?

Fixing a leak in your roof is an emergency. Buying your grand nephew a graduation gift is not.

2. Is it a real need or just a want?

We can convince ourselves of almost anything. My car may be 10 years old and I’d like a new one. But that doesn’t make it a need. Much less one worthy of tapping into my emergency fund.

3. Must you spend the money right now?

Is it possible that you can do something that would allow you to avoid the expense for a while? When you’re pressed, often you’ll find ways to postpone or eliminate an expense.

Don’t Wait Until Retirement To Create an Emergency Fund

If you think it was hard saving up an emergency fund while you were working, try doing it when you’re on a fixed income.

According to a Bankrate.com survey: 35% of baby boomers and 57% of Gen X reported having less than three months of emergency savings. Some of these folks have no emergency savings.

Where To Invest Your Emergency Fund in Retirement

You need to recognize that your emergency fund is special in that you need to know that it’s always fully there. That means that you cannot take any risks that you’ll lose part or all of your money. You’re limited to investments that guarantee that each dollar you invest will be available if you should need it.

An old-fashioned savings account is the first option that many retirees think of for investing their emergency fund. Your money is safe and you can access it if needed without a lot of effort. The trouble is that it will earn almost nothing in interest.

A money market account with check writing is another familiar option. Again your money is safe and the checks make it readily available. You will probably face a higher initial minimum deposit than a savings account and the interest will still be minimal.

Once you’ve accumulated enough you’ll want to consider a no-penalty CD. Traditional CDs have a penalty if you withdraw your money before the CD reaches its maturity date. A no-penalty CD avoids that problem. You’ll earn a little more than on a savings or money market account.

Some advisors will encourage the use of stock mutual funds. Before choosing that option, you need to consider whether you’re able to handle the risk of losing some of your money. There’s nothing worse than having an emergency and finding that your emergency fund is less than expected because of a poor stock market.

While it’s appropriate to have some stocks/mutual funds in your general retirement accounts, that’s not a good choice for your emergency fund. If an emergency should happen after a stock market correction, you’d be forced to sell before your investment could recover.

Creating and Using an Emergency Fund in Retirement: FAQs

These are some of the questions people have as they approach retirement:

Do I Need An Emergency Fund In Retirement?

Whether you earmark part of your retirement fund as an emergency fund or keep your emergency fund separate, you will need to have money available for emergencies. As you age, the kind of needs you have will change. You may have moved out of your home and no longer face home repair emergencies. But as you age you’re more likely to face medical emergencies.

How Big Should My Emergency Fund Be As I Approach Retirement?

Some advisors suggest that you increase the size of your emergency fund as you approach retirement age. Especially since replacing money in your emergency fund is harder in retirement. It was easier to add a little each month when you had a regular paycheck. Therefore, advisors recommend that you have 12 to 18 months of expenses in your emergency account.

As I mentioned above, three to four years’ worth of expenses may better cover the types of financial emergencies you may face in retirement.

Will My Need for an Emergency Fund Change As I Age?

Taking money from your retirement accounts (IRA, 401k, etc.) in place of money from an emergency fund might seem like the same thing. But it’s not.

Money in your emergency fund has already been taxed. Money in your IRA or 401k has not. So any money that you take from those accounts will add to your taxable income. And, if you’re under 59 1/2, you’ll face an early withdrawal penalty.

And, depending on how your retirement accounts are invested, you may be forced to sell investments when they’re at a low point.

Could a HELOC Replace an Emergency Fund?

If you have significant equity in your home and have a home-equity line of credit arranged, borrowing against your home can cover emergency expenses just like an emergency fund. You’ll need to be careful not to expand your definition of what constitutes an emergency. It can be easy to suck all the equity out of your home.

Can a Reverse Mortgage Replace an Emergency Fund?

A reverse mortgage is another way to draw equity out of your home if you or your spouse is 62 or older. You have the option of taking regular monthly payments or only taking out money when you request it.

Just like a HELOC, you’ll need to be careful not to be too quick to call something an emergency. It’s easy to consume the equity in your home without realizing what you’re doing.

What Can I Do To Reduce the Odds of Needing Emergency Funds in Retirement?

If you’ve moved into rental housing, you may have already reduced the possibility of needing emergency funds significantly. Some other risks (like auto collision or repairs) can be covered by insurance if you choose.

It’s good to reduce the need for emergency funds in retirement. But you need to keep that goal in balance. Usually, reducing the risk means spending money. You may be better off accepting the risk of needing emergency funds.

How To Accumulate an Emergency Fund Before or After Retirement

You may decide that you want to have a separate unique emergency fund. But you’re not sure how to accumulate it. We can help. Take a few minutes to consider some of the ideas our readers suggest in Side Gigs That Can Make You Extra Cash and Making Money with a Retirement Hobby. Also, take a look at Easy Ways to Build an Emergency Fund on a Tight Budget. You might find that you can fill your emergency fund in retirement with a minimum of effort!

• Changing Financial Behaviors In Retirement
• Managing and Using Credit Cards in Retirement
• What You Need To Know About Long Term Care Insurance Before You Retire
• Could Debts Ruin Your Retirement?
• Declaring Bankruptcy In Retirement: What You Should Know

Reviewed July 2023

About the Author

Gary Foreman is the former owner and editor of the After50Finances.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.