Creating an emergency fund is important for every retiree. With that said, individuals who are preparing to retire should focus on setting aside money for unexpected situations to ensure they have a stress-free retirement. Today we’re going to talk about why an emergency fund is necessary and how to create an emergency fund for retirement.
Why an Emergency Fund is Necessary
Saving for retirement is necessary to have the life you want after your career. But retirement savings alone is usually not enough to face the unexpected changes that life can bring.
An emergency fund is needed to protect your income and help you face challenges as you continue to live. You might want an emergency fund to help support your kids or grandkids, help with medical and insurance needs, pay unexpected debts, and more.
How to Create an Emergency Fund
The first step is to decide how much you need to save. This will depend on what you personally feel you need to feel secure.
With that said, it’s important to get an idea of your monthly expenses. Be sure to not leave any expenses behind. Consider big bills such as housing, property taxes, and debts. Consider smaller bills as well like food and groceries.
The next thing to think about is how many months of expenses you would like to have in the bank to feel secure. Ideally, it’s good to have three to six months of expenses lined up for an effective emergency fund.
Once you’ve saved up for your emergency fund, the next thing to think about is where to keep the money. When it comes to savings, many individuals are taught to put their money in accounts such as a 401(k), CD, or money market.
While this is a great plan to build financial security, this isn’t the best solution when it comes to an emergency fund. This is because drawing out of these types of accounts typically leads to some kind of penalty as they are designed for you to keep the funds in there for a period of time.
An emergency fund is meant to support your financial needs in the case of an emergency, which means you need to be able to access money quickly. With that said, consider a local bank or online savings account instead. This enables you to keep your emergency funds separate while still being able to access them when necessary.