Here's What Happens When You Don’t Have an Emergency Fund After You Retire

Most financial experts and planners agree that keeping a three- to six-month emergency fund is sound advice. Keeping a hefty pile of cash in a savings account can put some ground beneath you when you need it most, especially when you lose a job, a spouse, or encounter a medical or life-saving emergency. 

But what about retirees? Do you need an emergency fund when you retire? After all, you'll likely have a nest egg to fall back on. Do you really need a separate savings account at a bank to stash emergency cash? 

Yes, retirees still need an emergency fund. Here's why. 

An emergency fund prevents you from selling investments at an inopportune time 

True, retirees may have saved enough to cover most emergencies. But those savings may not be liquid cash. And for retirees with a significant portion of their savings in investments, like index funds and stocks, an emergency expense could force them to withdraw at an unfavorable time, like market downturns and recessions. 

In other words, when you don't have an emergency fund in retirement, you could be forced to sell investments for a loss. Depending on how poorly your investments are performing, that loss could be significant enough to shorten your portfolio's longevity.

In this case, an emergency fund could help you pay your monthly expenses, without dipping deeper into your investment portfolio. It can also prevent you from breaking contracts, such as those on CDs and annuities, which may have early withdrawal penalties, as well as avoiding high-interest debt, such as credit cards and loans. 

How much should retirees set aside for emergencies? 

The general rule of thumb is to save three to six months of living expenses as an emergency fund. However, for retirees, I'd recommend having closer to one to two years of cash free from investments, annuities, and CDs. Most bear markets don't last longer than a year, with the average being somewhere around 289 days, and one to two years of cash should give you plenty of time to start withdrawing when conditions are more favorable. 

Even if you don't plan to have your retirement savings tied up in investments, it's sound financial planning to put an emergency fund in an account that's easily accessible, such as a basic savings or checking account. You could take advantage of high-yield savings accounts, but be mindful of withdrawal limits, as you want to minimize penalties to keep more money in your savings. 

Fortunately, if you've saved enough for retirement, building an emergency fund could be as simple as moving money around. Selling investments when the timing is right -- that is, when you're not going to sell for a loss -- could help you start or replenish an emergency fund in another account, even if the money doesn't have a strong rate of return there. 

In the end, this is money you will eventually use, whether it's an emergency or not, but keeping it in a low-risk account could mean avoiding losses and penalties, effectively protecting the longevity of your retirement savings.