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Emergency fund in retirement

Chris Farrell Jun 29, 2012

Question: Your most recent program discussed the amount and kind of emergency funds needed for people working. My question is what those of us who are retired should consider for emergency funds. Thanks. William, Schenectady, NY

Answer: Surprisingly, I think the size of the emergency fund — better yet, a margin-of-safety fund — should be even larger for retirees. Instead of 6 months’ to a year’s worth of living expenses for the typical working household, I would aim for 18 months’ to 3 years’ worth of living expenses for the typical retiree. However, it’s easier to accomplish for many retirees, since a hefty chunk of their savings is parked in safer assets (hopefully). That’s why it’s really a margin-of-safety fund.

Of course, when you’re retired, you don’t need an emergency fund to tide you over for a spell of unemployment. Instead, you can rely on a steady, monthly Social Security check.

Still, retirees face a number of traditional unexpected and unanticipated expenses, such as a blown car engine or broken-down boiler. Despite Medicare, medical and dental expenses are big. Then there are additional expenses that aren’t necessarily on everyone’s list but maybe should be. For instance, a couple weeks ago, Henry Hebeler of sent me a note on unanticipated expenses. He had just returned from a wedding of a grandson in California:

When planning for retirement, few people remember to make allowances for their children. Their children get married and have babies. This will cost you money when they get married or have their own children, whether near your home or in a city far away. … And what happens when those great-grandchildren are born? Grandma just has to see them. (We have one on the way.) More travel and more gifts! Now we’re talking exponential growth of bills.

Or how about helping out a child with a serious ailment that lives across the country? Or a daughter or son that remarries — maybe to a more acceptable person in your eyes. Then there are the deaths of parents who may have lived far away. Here you have to add your share of funeral expenses, if their estate had not already planned for the inevitable.

And, believe it or not, retired people have “vacations.” These can really up the ante. And what happens when your roof has to be replaced? Borrowing money in retirement can be very expensive. So, next time you try to estimate how much you need in retirement, you better think outside the box of the conventional list of mortgage, utilities, food, clothes, etc.

What’s more, you want to have enough set aside (minus your Social Security payments) to cover expenses when the markets and economy are in the tank. That’s why I would consider somewhere between 18 months and 3 years as a savings goal. It will tide you over through most downturns.

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