Why Retirees Should Keep a 'No Touch' Emergency Fund

Many retirees have cash funds to cover predictable monthly expenses, but it's also important to set aside some cash for a "no touch" emergency fund.

This account is exclusively for surprise costs that are separate from everyday spending and planned retirement withdrawals.

How an emergency fund is different from regular savings

An emergency fund is for true emergencies, such as a surprise medical bill or urgent home repair, instead of regular expenses or discretionary purchases. This fund acts as a financial safety net that can help you more confidently keep your remaining cash in the stock market. It can be kept in a high-yield savings account so that it’s accessible as soon as you need it. That way, you can earn a return on your idle cash while you wait to deploy it for an emergency.

An emergency fund may not seem appealing when the stock market is doing well and your investment portfolio balance is growing but your emergency fund isn’t. However, that extra cash can help with costs you won’t see coming and let you avoid selling investments at a loss.

Why retirees need one even more than workers do

An emergency fund is an important financial tool for people of all ages, but it can be especially important for retirees. Once you leave the workforce, you aren’t receiving a steady paycheck that can offer a financial cushion for surprise bills.

While retirees can generate income from Social Security, pensions and investment portfolio withdrawals, they often don’t have as much flexibility to cover emergency costs. Plus, Social Security’s cost-of-living adjustments may not match your personal inflation rate based on how you spend your money, especially if you are spending much of your money on health care, housing and insurance.

Retirees can sell more of their assets during an emergency, but that also comes with risks. If you have to sell investments during a down market, you are locking in losses that can be difficult to recover from in the long run. Meaningful losses incurred from emergency-related selling can tighten your budget in future years and reduce your withdrawal income. Those higher withdrawals can also result in higher taxes if you have traditional retirement plans.

How much retirees should keep in a no-touch fund

There’s no one-size-fits-all number, but retirees often need a larger cushion than the standard three-to-six months' worth of expenses that financial advisors recommend for non-retirees. Some retirees have health issues that can turn into the need for long-term care. That can be expensive, and it’s good to have some money set aside just in case. Retirees with high medical costs and dependents will need more money than someone who has a guaranteed income and low housing costs.

If you ever pull from your emergency fund for an emergency, you should aim to replenish it as soon as possible. That may mean temporarily cutting back on discretionary spending and focusing on the essentials. Setting aside enough money to cover up to one year of expenses in this fund may give you the necessary cushion to be prepared for any surprise expense.