Retired? Here's How Much You Actually Need in Your Emergency Fund

Stop me if you've heard this before: You should keep enough money in an emergency savings account to cover three to six months' worth of expenses. (Anyone who's ever written about personal finance probably feels like they have that little ditty tattooed on their brain. We certainly dole it out often enough.)

But what if you're retired? How much should you keep tucked away in an emergency fund? Do you even need an emergency fund? Here, we'll dive in and offer a slightly different take on the subject.

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Income sources matter

If your cost of living is extremely low, you may have more income than you need to cover all situations, including emergencies. Let's say you've retired with very few bills, but your income is robust. You have Social Security or perhaps a pension. You spent years building your retirement accounts, and now they provide far more than you need to pay your monthly obligations.

You may have annuities, rental property, or other sources of regular income. If that's the case, you probably don't need as much in a dedicated emergency fund as the average retiree.

However, if you're making ends meet but not rolling in the dough, you may want to consider increasing the amount of money held in a dedicated emergency fund. Here's why.

Your number should fit your circumstances

Let's say your roof blows off in a freak storm, and your deductible to replace it is $2,500. If you were still in the workforce, it might be a hassle to come up with $2,500, but having a job means you can earn the money back once it's been spent.

Image source: Getty Images.

That's not the case when you're retired. You have a fixed amount of money, and unless you plan to return to the workforce, a set amount of money is available to carry you through.

As you determine how much to aim for in an emergency account, factor in both expected and unexpected expenses. For example:

• Fixed monthly expenses: This includes housing, transportation, food, utility costs, and any other fixed bills you pay each month.
• Less frequent expenses: Factor in homeowners association dues, insurance premiums, and other bills you pay semi-regularly.
• Downturns in the market: No one enjoys downturns in the stock market, but like the ebb and flow of the ocean, they're a part of life. The last thing you want to do is withdraw more from your retirement accounts than necessary when the markets are down. Expanding your emergency fund will allow you to skip all but required minimum distributions (RMDs) as the market struggles.
• Repairs to home and auto: If you own a home, count on spending approximately 1% to 2% of its value on maintenance and repairs each year. If you have one or more vehicles, you'll want to add at least enough to cover your insurance deductible to your emergency account.

Your bottom line

The goal of an emergency savings account is to prevent you from having to draw down your retirement account or charge expenses on a high-interest credit card. However, the amount you need will be unique to you. This simple exercise will help you determine how much to aim for.

Add:

• Three to six months' worth of expenses. If your expenses run $5,000 monthly, you'll want at least $15,000 to $30,000.
• The insurance deductible on your home (you'll find this information in your homeowners policy).
• Your auto insurance deductible.
• Home maintenance needs -- 1% to 2% of the value of your home. For example, if your home is worth $300,000, try for $3,000 to $6,000.
• Enough to cover another three to six months' worth of expenses if the market is down and you need to draw from your savings instead.

Subtract:

• Any extra money you have left after paying bills each month. Let's say you regularly end the month with an extra $1,000 to put into savings or reinvest. Redirecting the money to your emergency account means having to come up with less.
• Also, subtract any money you have already tucked away in an emergency fund.

One word of caution: Don't leave your emergency fund in one of your retirement accounts. Here's why:

• You'll have to pay taxes you may not have budgeted for in that calendar year.
• You won't have instant access to the funds.

Don't get discouraged

Few people can afford to fund an emergency account immediately. Once you figure out how much you need, slowly chip away at it by depositing what you can. You may never need the money, or may not need as much as you save. However, knowing it's there if you need it will be reassuring.

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