Emergency funds are money put aside specifically to be used for unforeseen expenses. This saves people from liquidating assets or taking on further debt to meet their financial obligations. During the years when you are actively employed, your emergency fund might also serve as a source of backup cash. This may come in handy if you are laid off from your job or are unable to work due to an extended sickness or a temporary disability. As you get closer to retirement, having an emergency fund may serve you in a variety of new capacities.

Protecting Long-Term Investments

If the market is doing poorly, you risk a loss if you take money out of your investment accounts. This is something that may take place during a recession. If you have money aside for unexpected expenses, you may want to take it out of savings first to allow your investment portfolio time to recover.

Assistance in Paying for Medical Expenses

When affording medical treatment, reserves for unexpected expenses might help fill in the gaps. Consider the scenario of a couple aged 65 who retire in the year 2020 but do not have retiree health care supplied by their job. According to Fidelity Investments, this couple may anticipate spending $300,000 on medical care, and this estimate does not consider the cost of long-term care. Suppose your health insurance or Medicare does not cover the whole cost of your medical treatment. In that case, you may find that your medical expenses continue to mount even after an accident, an unexpected diagnosis, or a major illness.

Compensating for the Loss of Part-Time Employment

If you augment your income with a part-time job or if your spouse still has a career, an emergency fund may offer a short-term income in the event one of those jobs becomes unavailable.

Coverage of Home Improvements Necessary Due to Old Age or Health

If you have trouble moving about, you could find that you need to adjust your house. You may need to construct a ramp, fit grab bars into a restroom, or enlarge the passageways and doors. If you have an emergency fund, you won't have to take money out of your 401(k), IRA, or pension to cover unexpected expenses.

How Much Money Should You Have Saved in Case of an Emergency?

The general rule of thumb for emergency money is to have enough to cover three to six months' worth of living costs. The following are some of the additional considerations that might affect the amount of money you will need after you retire:

• Your regular retirement income consists of income from sources such as Social Security benefits and pension payments, as well as annuity income and monthly withdrawals from investment or retirement accounts.
• How well protected is your portfolio against potential losses? Remember to take into account the distribution of your assets.
• What you have accessible in liquid savings: It might be a savings account, a money market account, or even a certificate of deposit.

Multiplying the entire amount of your monthly costs by the number of months you want your emergency fund to cover will give you an approximation of the minimal amount you will need. Let's imagine you want to build up an emergency fund that would last you for a year and that your monthly costs come to $5,000. That indicates you'll need $60,000 stashed up in a savings account just for unexpected expenses.

What should you do if most of your retirement savings are held in cash or other investments that guarantee their value? This indicates that market downturns will have little effect on them. In this particular scenario, you probably won't need an emergency fund much greater than the suggested amount that will cover your costs for three to six months.

If a significant amount of your savings for retirement are allocated to investments in assets such as stocks and bonds, it may be prudent to establish a sizeable emergency fund. Because of this, you won't feel as much pressure to take money out of investments when the market is doing poorly.

Where Should You Keep Your Emergency Fund If You Can't Afford to Lose It?

When you need it, the money in an emergency savings account should be readily available and easy to access. You also do not want it to be susceptible to market gyrations, have liquidity issues, or incur withdrawal costs. Accounts guaranteed by the FDIC (or the NCUA) are ideal options for the reasons stated below.

High Yield Savings Account

Your money will be easily accessible in high-yield savings accounts, and you will often receive above-average interest rates on deposits made. These accounts may be connected to a bank account so that money can be moved between them more easily. Traditional banks, credit unions, and internet banks are the three types of financial institutions that carry them.