Do you remember, when you were a kid, how much more fun it was to play goalie in a pickup soccer game if you actually had a net behind you? You didn’t have to scramble nearly as much when your opponent surprised you and the ball blew past. The net caught it for you.
That’s kind of how it is with a rainy-day fund. You can probably get by in retirement without one, but you could be left scrambling when unexpected expenses come up.
And for most, they will come up. Maybe you’ll need to replace your old roof, your old car or your old AC unit. Perhaps you’ll want to give your daughter the funds to start her own business. Or you might decide to help your son put a down payment on a new house after he gets a divorce.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The emergency fund you should have had when you were younger can be just as critical when you’re older. Maybe more so, because you won’t have a regular paycheck to depend on anymore.
But what I’m seeing fairly frequently these days is that even the best savers – those who diligently contribute to their 401(k) plan every month, the maximum allowed or at least to the company match – aren’t necessarily accumulating liquid assets they can easily tap into when they need extra money.
As they head for retirement, they may be in for an expensive surprise. If they choose to pull out a chunk of their tax-deferred money to pay for those unplanned costs, it could have a ripple effect they didn’t expect.
Let’s say a frugal saver who has a robust 401(k) needs a new car, and the one she chooses costs $35,000. She doesn’t want to take out a loan, so she decides to take the money from her retirement savings. What’s the harm, she asks herself; she’s over 59½, so there’s no extra penalty.
No, but there are still consequences. Because she hasn’t already paid taxes on that money, she’ll have to pay taxes on those withdrawals as though it were ordinary income. To buy that $35,000 car with her 401(k) funds, she’ll have to take out an extra 20% to 30% to cover the taxes. And if the market is down when she withdraws the money, it could have an even more significant long-term impact.
The usual recommendation is to have enough in an emergency fund to cover at least six months’ worth of expenses in case you can’t work or you lose your job. In retirement, though, it’s a little different. You’ll have Social Security, your pension (possibly) and other income streams to cover day-to-day costs. Your savings will be for extra needs and wants. You may wish to sit down and think in terms of potential emergency situations to arrive at a reasonable amount. Or you can keep it simple and sock away a lump sum of $50,000, $100,000 or more, based on your lifestyle or any big expenses you might see coming down the road.
You’ll also want to stay disciplined about replenishing that rainy-day fund and work it into your overall retirement plan.
I often advise clients who expect to retire in two to three years – who still have good cash flow from working at their job but are winding things down – to contribute just enough to their 401(k) to get their employer’s matching contribution and shift the rest to a savings or money market account to build up a cash reserve. They may even decide to stop their contributions altogether.
It isn’t easy to move money from an account that’s earning money to one that pays almost nothing – I get that. You’ll need some money immediately accessible in cash at your bank, but consider keeping the remainder of your emergency savings in money market funds or a money market account. These earn interest, are easy to liquidate and come with low or no penalties for withdrawals.
The important thing is we want to make sure there’s some emergency money available, because even if you’re debt-free, one big bill could have a significant impact on your retirement plan. Ultimately, your emergency fund is to protect your income-producing investments, and the more you have in your retirement rainy-day fund, the less likely you’ll need to tap your investments.
Financial professionals talk a lot about the importance of proper asset allocation when deciding in which financial vehicles to put your retirement money. But this simple but vital asset – money set aside for liquidity and enjoyment – is often overlooked. Talk to your financial professional about how and when you should build a cash reserve into your plan.
Kim Franke-Folstad contributed to this article.
-
Nvidia Earnings: Live Updates and Commentary May 2025Nvidia's earnings event is less than a week away, and investors are keyed into the AI bellwether's results.
-
Stock Market Today: Dow Falls 817 Points as Bond Yields RiseFinancial markets are once again focused on Washington, D.C., but taxes, not tariffs, are driving recent price action.
-
What's Up With the 10-Year Treasury Bond: Four Financial Experts Weigh InA financial professional and three colleagues explain the fluctuations in the 10-year Treasury bond and what investors should do.
-
Time to Spring-Clean Your Finances: A Financial Professional's Four Steps to Tidy Them UpA midyear review of everything from spending to saving, with adjustments as needed, can set you on track to financial security. Plus, don't forget to check in on your workplace benefits.
-
Why a Law Firm Secretly Recording Client Conversations Is Wrong (and Illegal)A law firm that has been recording client conversations without the clients' knowledge or permission and has threatened employees if they speak out faces legal and ethical challenges.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
