The Real Reasons Why Retirees Still Need A Healthy Emergency Fund

Emergency funds aren’t just for young families or people in the prime of their careers—though most emergency fund articles are geared toward this demographic. 

Retirees need emergency money, too. 

Why? Let’s take a look.

A Brief Recap On Emergency Funds

Emergency funds, or rainy day funds, are built to protect you in the event of an unexpected event—job loss, illness, surgery, unexpected family death, etc. It’s a cash cushion to keep you from going into debt. 

While there will always be an ongoing debate on the role cash should play in your financial plan, establishing a healthy emergency fund can provide a safety net and buffer against stress, frustration, and debt.

Emergency money should be highly liquid—safe in a savings account, short-term CD, money market account, or equivalent—to grant better accessibility. Suppose your emergency money is tied up in the stock market. In that case, you have to sell the security before accessing the money (you also have to pay capital gains tax—an additional payment during an already stressful time). 

How much should retirees keep stashed away? 

While the exact amount saved should take your other assets, insurance coverage, and current expenses in mind, many retirees would do well to accumulate about three months of living expenses. 

If you’re not working in retirement, you might not need your emergency fund for the same reasons you might have earlier. 

Why would retirees benefit from emergency money? Let’s explore.  

Health Costs Outpace Inflation and Medicare Won’t Come To The Rescue. 

Healthcare costs are rising at alarming rates. A recent study found that medical costs are outpacing the growth of the U.S economy—not a pretty picture. 

Plus, a study by HSA provider Lively found that retirees expect to spend 40% of their nest egg on medical costs alone. Almost half of total retirement spending is allocated to the healthcare space! While substantial, it’s not too surprising to see how you could get there. 

Between copays, deductibles, co-insurance, and gaps in Medicare coverage, seniors shell out the big bucks for medical care in their golden years. 

Retirees are at a much greater risk for requiring extended medical care like surgery, prescription medications, physical therapy, and more, but Medicare can’t cover all of your needs. Medicare rarely covers dental or vision visits, for example, and those specialists can add up over time.   

Picture this: a few teeth need to be extracted, and you want dental implants. The average cost for a dental implant in Southeast Michigan runs about $1,750. That cost might not include extractions, bone grafts, and other ancillary procedures associated with it. 

Most Medicare plans don’t cover dental, and even if you have dental insurance, the company may only pay 50% of the procedure. In many medical practices (physician, dentist, optometrist, veterinarian, etc.), it’s not uncommon to have to pay all or a portion of your treatment ahead of time You will need to foot the bill out of pocket. It’s critical to have funds to do that.

Caregiving Services Are Costly—Even for A Short Period

Caregiving is costly across the country, but especially in Michigan, where the price of a private nursing home room can run you nearly $117,000 a year. 

Don’t think you’ll need to worry about added care? The same study concludes that 70% of people over the age of 65 will require long-term care at some point in their lives. Even if you’re in good health, odds are you may need extended assistance, even for a short period. 

So, you’ll need sufficient funds to pay for it.

Part of your plan may include long-term care insurance. But insurance coverage doesn’t mean you won’t incur out-of-pocket expenses. To qualify for payments, most insurance companies require a specific health plan written by your doctor and a separate nurse evaluation. Nearly all policies also have elimination periods of either 30, 60, or 90 days where you need to foot the bill before the benefits kick in. 

Perhaps you’re looking for home care a couple of days per week as you recover from surgery. That service costs about $23.00 an hour in Michigan, so even 5 hours will run you over $100 per week.  

You want to have access to enough cash so you can pay for the care you need. When it comes to long-term care, a steady cash flow provides you with more options for care. 

Your Retirement House Isn’t Immune From Problems.

Whether you’re snowbirding to Florida (hello hurricanes) or living in Michigan full time (ice storms, power outages, and blizzards, oh my), your house is prone to accidents. 

Whether it’s a burst pipe, a storm-damaged roof, or anything in between, you must have the funds to cover it. Your home insurance should help, but it might not cover all costs.

Consider regularly stashing away funds in your savings to replace or upgrade appliances, replace a furnace, get a new roof, etc. You may need that extra cash for ongoing maintenance like cleaning gutters, shoveling the driveway, or other tasks that you simply can’t do on your own as you age. 

Not Keen on Cash? A Few Saving Alternatives 

Maybe three months’ worth of expenses feels too much for you in retirement. What other options do you have? While you should still retain a cash buffer, you can look into the following options as well. 

Use your HSA

Healthcare costs are like a labyrinth for retirement planning—full of ups, downs, twists, and turns that no one can fully anticipate. 

A great savings antidote is a health savings account (HSA). If you have a high-deductible health plan, you’re eligible to open this tax-advantaged account and stash up to $7,100 for a family plan with an extra $1,000 in catch-up contributions per year. 

HSAs are like hitting the tax jackpot. When used in qualified circumstances, contributions, earnings, and distributions are tax-free. Unlike a flexible spending account, funds roll over each year, providing an excellent opportunity for long-term savings.

Retirees can tap their HSA to help pay for healthcare expenses that Medicare doesn’t cover. 

Leverage safer and more liquid investments like bonds or blue-chip stocks.

Your portfolio isn’t simply comprised of high-risk equities. There are several less volatile and more secure assets that you can invest in, like bonds and blue-chip stocks, to bring more reliable and secure growth to your portfolio. 

Balancing your investments with more stable investments can provide you with the funds you need to cover some unexpected expenses. 

Ensure proper risk management and insurance coverage

No matter your stance on emergency funds, you should have a robust risk management strategy in place to safeguard your assets’ long-term. Ask yourself,

• Do you have the right insurance coverage? 
• Are there some policies you can get rid of?
• How does your investing strategy take your risk tolerance and capacity into account? 

Emergency funds can come in handy both in your 20s and well into your golden years. Ready to create an intentional place for cash in your retirement portfolio? Schedule a 15-minute call with us today.