Most financial planners will tell you that having an emergency fund to cover unexpected bills (like major car or home repairs or a trip to the emergency room) is a key to financial security.
The most commonly cited rule of thumb for how much you need in an emergency account is three to six months’ worth of living expenses. This buffer can help keep you from dipping into your retirement savings and incurring early withdrawal penalties if an unexpected large expense comes up.
But what if you’re retired and there’s no penalty for hitting up your retirement account in the event of an emergency?
So how much cash should a retiree have?
Many experts recommend that retired folks keep between six and twelve months of daily living expenses in cash. Some even suggest keeping up to three years’ worth of living expenses in cash.
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Where to stash your cash
First things first: your emergency fund must be easy for you to access at any time.
You should also avoid putting it in any account that could lose value, like stocks or a stock mutual fund.
Let’s say most of your retirement savings is invested in various stock funds. If you withdraw money from those accounts during a severe market downturn, you will realize a loss. It’s just better for your bottom line to live off cash than to sell out of stocks at a low point.
Bank accounts are insured for up to $250,000. You won’t lose up to that amount of money if your bank goes under. But that doesn’t mean you should keep a five- or six-figure balance in a regular savings account. There are better earnings potential in other types of investment vehicles.
If higher earnings don’t tempt you to explore other options, remember this: keeping all your cash in a low-interest savings account means your money will buy less as prices for everything—from milk and eggs to gas for your car—rise over time.
A money market account is one possibility. Be aware that some charge high fees that will deplete the value of your savings.
You may also consider buying a certificate of deposit (CD). Getting money out of a CD isn’t always easy, though, so look carefully before you leap.
Whatever you do, don’t stash it all under your mattress. Keep enough cash at home to buy a tank or two of gas for your car, plus a few days of groceries and water.
If you aren’t sure how much cash you need to keep on hand, or where to keep it, a financial advisor can help you find the right answer for your situation. Request a complimentary, no obligation conversation with one of our advisors toady to get started!