Retirees Need Emergency Funds Too

Unexpected expenses can come out of nowhere. Here are some tips to be prepared.

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You may think of an emergency fund as the cash stash to keep when you are working, with employees typically advised to save six months’ worth of living expenses in the event of a job loss or other income shortfall. But retirees may need emergency funds, too, even if savings cover basic living expenses.

Unanticipated costs can upend your careful financial planning: a broken furnace, a leaky roof and other maintenance on a house. Thousands of dollars in dental work for implants or other oral health problems, which traditional Medicare doesn’t cover. Adult children or other family members who need financial help.

Even natural disasters could sideswipe you. In Austin, Tex., financial planner Bradley Phillips says that some of his older clients with second homes endured a series of floods recently and now face expensive rebuilding requirements not covered by insurance. “There are things that are going to happen that you just can’t foresee,” he says.

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If all your money is tied up in tax-deferred retirement accounts, you’ll get hit with a tax bill if you dig into that money for an emergency. But creating an emergency fund takes some planning. You don’t want to set aside too much cash and lose out on the opportunity to keep it invested for the long term.

How to Build an Emergency Fund for Retirement

It's not too late to start building an emergency fund, even if you are near or in retirement. Use any tax refunds, bonuses if you are still working, or extra money from a part-time or side gig, says Elyse Foster, a financial planner with Harbor Wealth Management, in Boulder, Colo.

Depending on your current cash allocation, you also might use required minimum distributions to build your emergency fund. Financial planner Jane Evelyn, age 73, of Kennebunkport, Me., uses this approach and advises clients to do the same. “A lot of things do not change in retirement, and that includes the occasional need for extra funds for the unexpected,” Evelyn says.

Work with cash you already have on hand, says financial planner Dave O’Brien, principal at Evolution Advisers, in Richmond, Va. Put that money into an account at a bank or credit union with a competitive interest rate to establish a “cash bucket” to help cover any emergency needs. You could refill the bucket occasionally at your discretion—when it’s getting low and when your investment account is relatively high.

When trying to figure out how much to set aside for emergency use, consider replacement costs of big-ticket items, such as appliances, and estimate amounts for unexpected events, such as car repairs. The amount you set aside for emergencies should be in addition to your cash stash that covers regular living expenses. (Many experts suggest retirees should have a cash cushion of three to five years’ worth of living expenses to cover their regular bills.)

Even retirees with plenty of cash on hand panic at the idea of unexpected bills, says Rand Spero, president of financial-planning firm Street Smart Financial, in Lexington, Mass. “I call it a rainy-day fund or a life-preserver fund instead,” he says.

If you are still working, address expensive projects before you retire. Replace a roof or furnace now, if you know it’s needed soon. If you handle home maintenance yourself, consider that as you age you might have to start paying someone to clean your gutters or do other repair jobs. Retirees often don’t include those costs in their retirement planning, Phillips says.

If you’d rather not set up a separate emergency fund, you can use reserves in your investment portfolio for unexpected costs, says Eric Ross, principal with Truepoint Wealth Counsel, in Cincinnati, Ohio. But be careful what part of your portfolio you tap. For example, he says, consider tapping short-term, high-quality bond funds, which “can be liquidated without worrying about meaningful changes in market price or capital gains.”

Mary Kane
Associate Editor, Kiplinger's Retirement Report
Mary Kane is a financial writer and editor who has specialized in covering fringe financial services, such as payday loans and prepaid debit cards. She has written or edited for Reuters, the Washington Post,, MSNBC, Scripps Media Center, and more. She also was an Alicia Patterson Fellow, focusing on consumer finance and financial literacy, and a national correspondent for Newhouse Newspapers in Washington, DC. She covered the subprime mortgage crisis for the pathbreaking online site The Washington Independent, and later served as its editor. She is a two-time winner of the Excellence in Financial Journalism Awards sponsored by the New York State Society of Certified Public Accountants. She also is an adjunct professor at Johns Hopkins University, where she teaches a course on journalism and publishing in the digital age. She came to Kiplinger in March 2017.