Where to Invest Your Emergency Funds in Retirement

An emergency fund is one of the most vital financial instruments. It is a safety net that can rescue you in the worst of times. Having one is essential for everyone, but it is even more significant for retirees. Retirees have a fixed income pool, making it hard for them to earn more money or withdraw from their existing corpus should unexpected expenses arise. This is why it is vital to prioritize building and maintaining your emergency fund as a retiree to help you weather unanticipated financial storms in the future.

A financial advisor can help you understand the importance of an emergency fund for retirees and look for suitable instruments to store your emergency funds. You can also read this article to learn more about the multiple options for storing your emergency money.

What is the purpose of an emergency fund?

The purpose of an emergency fund is to provide a financial safety net in case of unexpected expenses or emergencies. An emergency fund can help you in diverse situations, such as a health-related emergency or a home or car repair. The need for it is further amplified in retirement, as you have a limited pool of money to rely on. With an emergency fund, you do not have to depend on credit cards or loans to cover unexpected expenses. You can enjoy peace of mind knowing you have a financial cushion to fall back on if needed.

Here are some reasons why having an emergency fund can be helpful:

1. For medical expenses: Medical emergencies can be costly, even with insurance. Having an emergency fund can help you pay for medical bills and other unexpected costs related to your health, such as prescription drugs, healthcare aids like a wheelchair, at-home care, etc.

2. For home repairs: Home repairs can be more often than not unexpected. Natural disasters, wear and tear, and other kinds of damage can require periodic and unplanned renovation. An emergency fund can help you cover the cost of repairs without having to take out a loan or rely on a credit card.

3. For car repairs: Car repairs can be expensive. An emergency fund can help you pay for repairs, parts replacement, expired insurance premiums, etc.

4. For unforeseen natural disasters: Natural disasters, such as hurricanes, storms, or earthquakes, can cause significant damage to your home and belongings. An emergency fund can help you pay for repairs or temporary housing if your home is damaged or destroyed.

The general recommendation for an emergency fund is to have three to eight months' worth of living expenses saved up. However, the amount you need may differ based on your individual needs and circumstances, such as your age, health, lifestyle, standard of living in your city, and other expenses. The key is to start building your emergency fund as soon as possible and to continue adding to it over time. It is also essential to get in touch with a financial advisor for advice on how to build an emergency fund.

Here are 5 options you may consider investing your emergency funds in retirement:

An emergency fund can be needed at an unexpected time. You may not have enough time to move around your investments or assets, so it is advised to keep an emergency fund in an easily accessible place. Liquidity remains one of the most important attributes when looking for the best place to keep an emergency fund. In addition to this, you must also prioritize safety and opt for low-risk options. Below are some options you can consider.

1. A high-yield savings account 

A high-yield savings account is a great option. It is most commonly used for emergency funds because it provides a relatively high-interest rate compared to traditional savings accounts while offering easy access to your money. You can typically withdraw cash from a savings account without incurring any penalties or fees. Moreover, most banks offer online and mobile banking options for added convenience, making accessing your money in a crisis or emergency easier. High-yield savings accounts are highly liquid, which is especially important for retirees as they may not have other income sources in a crisis.

High-yield savings accounts are generally considered safe investments because they are Federal Deposit Insurance Corporation (FDIC) insured up to $250,000 per depositor, account type, and institution. This means that even if the bank fails and you lose your money, you can still recover your funds up to the insurance limit. High-yield savings accounts can also generate a small amount of income through interest payments, which can be helpful for retirees to beat inflation and supplement their retirement income. Savings accounts can provide steady, predictable returns over time. While the interest rates may not be as high as other investments like stocks, mutual funds, etc., the risk of losing your principal is also much lower.

2. Money market accounts

A money market account can be another option for an emergency fund for retirees. Like high-yield savings accounts, money market accounts are also generally considered safe investments. These accounts are also insured by the FDIC. Additionally, they are unaffected by market volatility and ensure that your money is not exposed to high risk or the threat of losses. Money market accounts may offer an advantage over the traditional bank savings account as they may offer a slightly higher interest rate, which can provide retirees with a better return on their emergency fund savings and keep up with inflation. Money market accounts can be opened online or in person at a bank. Moreover, they offer online banking features like savings bank accounts, debit cards, and check-writing privileges, making them easier to access and manage your money.

Money market accounts also have a limited balance requirement that can prove to be an incentive to save and not use your emergency fund for reasons other than a financial crisis.

3. Certificate of Deposit (CD)

A CD is a type of term deposit that can be opened with a bank or credit union. These deposits function just like a savings account but typically offer a higher interest rate than a regular savings account. However, your money is locked for a set period of time, such as a few months to some years. In return, you are paid interest on your deposit. The higher interest rates make CDs ideal for retirees looking to earn a reliable stream of income in retirement. CDs are also insured by the FDIC and are safe for parking your emergency funds. Moreover, the principal is protected, and the interest rate is fixed, so you can be confident that your funds will not be subject to market fluctuations or volatility.

There are some drawbacks to using a CD for an emergency fund. CDs have a fixed lock-in period, and there may be penalties for early withdrawals if you need to withdraw your funds before the CD matures. This can be a significant disadvantage if you need the funds for an unexpected emergency. CDs are less liquid than savings accounts and money market accounts because you generally cannot access the funds until the CD matures. However, it can help to open a deposit early along with maintaining some funds in a bank account. This way, if you have a financial need, you can rely on your bank account and eventually use the money in the CD.

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4. Treasury bills and treasury bonds

Treasury bills (T-bills) and bonds are fixed-income securities issued by the U.S. government. These are debt instruments backed by the federal government, which makes them low-risk securities. This means you can be confident that your principal amount is safe. T-bills are short-term debt securities having a four-week to one-year maturity period. Treasury bonds are long-term debt securities with a maturity of ten years or more. Treasury securities often offer higher interest rates than savings accounts, money market accounts, and CDs. So you may earn a better return on your emergency fund savings. T-bills and bonds can be easily bought and sold, so you can quickly access your funds in an emergency. Moreover, these securities can provide diversification benefits and help reduce risk and volatility in your overall investment portfolio. This can lead to better earnings over time and more money to spare for your emergency fund, other financial goals, and expenses.

However, you must be mindful of some disadvantages of using Treasury securities for an emergency fund. Treasury securities are subject to interest rate risk. If interest rates rise, the value of your investment may decline. This can be problematic if you need to withdraw funds in a rising interest rate environment. Treasury securities may also not offer returns like other inflation-beating investments, such as stocks, making it harder to keep up with inflation. Nevertheless, their low risk and liquidity make them a good option for an emergency fund for retirees.

5. A Roth Individual Retirement Account (IRA)

A Roth IRA can be used as an emergency fund by retirees. A Roth IRA is not taxed in retirement after the age of 59.5 as long as the account has been open for at least five years. This can be advantageous in an emergency as you can withdraw your funds without incurring any tax penalties. Unlike a Traditional IRA, there are no Required Minimum Distributions (RMDs) with a Roth IRA. This makes the Roth variant a much more flexible financial tool in times of need. However, you must understand that a Roth IRA is not typically used as a short-term investment. It is a long-term investment that offers growth potential over time. Hence, while it can be a good option for retirees who have already built up their IRA savings and are looking to benefit from the tax-advantaged account for their future needs, it may not be ideal if you are building an emergency fund from scratch.

A Roth IRA is also subject to market risk, and the value of the account may fluctuate based on market conditions. However, it can be great for diversification and help you build your savings over the years.

How to build and use your emergency fund

Apart from knowing where to keep my emergency fund, it is also essential to understand how to build and use your emergency fund when the opportunity arises.

Here are some steps you can follow:

1. Determine your target amount: Most financial experts recommend saving at least three to eight months' worth of your expenses. However, you can come up with a different target amount if it suits you and your needs well.

2. Start small: Start with smaller savings and work your way up. For example, you can aim to save $500 and then gradually increase the amount. It can help to fix a monthly target to save more money consistently.

3. Set up automatic savings: Set up automatic transfers to a dedicated savings account or other instruments from the list above. This will help you make regular contributions to your emergency fund without lapses.

4. Regularly reassess your emergency fund: Adjust your emergency fund if your expenses and income increase or decrease. For instance, you may need to increase your savings rate if your lifestyle demands more money.

If a crisis arises, remember to follow the steps given below:

1. Assess the situation: Before using your emergency fund, assess the situation to determine if it truly qualifies as an emergency. If not, see if you can pay out of pocket.

2. Only use what you need: It can be overwhelming to see a lump sum pool of money, and you may end up spending more than you need for the emergency. Using only as much as you need to cover the expense is important. Avoid using your entire emergency fund unless absolutely necessary. If you use all of it, start building it up as soon as you are in a better financial state.

3. Prioritize your expenses: If you have multiple unexpected expenses, prioritize them based on urgency and severity. For instance, if there are damages to your house due to a natural disaster, you may first focus on home repairs as they can be more critical for your safety and well-being. Likewise, in the case of medical issues, it is best to pay attention to those first.

To conclude

Remember, your emergency fund is there to protect you from financial hardship during unexpected and urgent situations. Therefore, looking for the best place to keep an emergency fund is essential to ensure safety, liquidity, and growth. It is also crucial to use it wisely and replenish it when necessary to ensure it remains a valuable resource when needed. Building an emergency fund can take time, effort, and discipline, but it is important to achieving financial stability and peace of mind. A financial advisor can help you create a safety net with adequate savings to help you in your hour of need.

Use the free advisor match service to find a financial advisor who can help you build an emergency fund for retirees. By answering a few basic questions about your financial needs, the match tool can help connect you to 1-3 advisors who are best suited to meet your financial requirements.

For more retirement planning strategies that are suited to your specific financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.