Life can change quickly. Emergencies and unexpected costs can happen at any time. You could lose your job and suffer through a stretch of unemployment. You could suffer an injury or illness that results in substantial medical costs. You may experience home damage or costly car repairs. These things and more are all common challenges for many households. That’s why an emergency fund is such a critical component of any financial plan.
Unfortunately, many Americans have little or no savings. A new study found that 66 million Americans have zero emergency savings. Another study found that 47 percent of Americans wouldn’t be able to cover a $400 emergency expense without borrowing money or selling something.1
Why do so many Americans lack savings? They may struggle with debt and be unable to meet their standards. They may have a standard of living that’s well beyond their means. Or they may simply think that an emergency won’t happen to them.
As you approach retirement, you may feel that an emergency fund isn’t a critical piece of your financial puzzle. After all, unemployment is no longer a concern. The same is true of disability-related work absence. With little debt, fewer expenses and sizable retirement accounts, you may believe that you have the means to weather any emergency that life throws at you.
The truth, though, is that an emergency fund is just as important in retirement as it is during your working years. Before you use your emergency reserve to fund a vacation or other large retirement purchase, consider the possible unexpected bills you may face in retirement. Below are a few common examples. If you don’t have an emergency fund in place, they could deplete your retirement assets.
Think Medicare will cover all your health care costs? Think again. Medicare doesn’t cover every form of care. Even if a treatment is eligible for coverage, Medicare usually pays only a portion of the bill. That means you’re on the hook for the balance. An emergency fund can help you pay for treatment and care not covered by Medicare.
You also may need your emergency reserve to pay for long-term care, which is often needed for seniors who suffer from Alzheimer’s, Parkinson’s or other cognitive disorders. The U.S. Department of Health and Human Services estimates that today’s 65-year-olds have a 70 percent chance of needing long-term care at some point.2 Long-term care often costs thousands of dollars per month and may be needed for years. Your emergency reserve can fund in-home care or even care provided in a facility.
Think you’re an empty nester because your kids are grown? Not necessarily. Many retirees are seeing their adult children return home or ask for financial support. In fact, this trend is so common that it’s prompted its own term: “boomerang kids.”
While financial support for your kids may not be in your retirement plans, it’s a very real possibility. All it takes is one job loss, divorce or medical emergency. You may want to think of your emergency fund as a reserve not only for you, but also for your adult children and their families.
Inflation is easy to forget, but it’s too important to ignore. It’s the gradual increase in prices from year to year. Often, inflation is modest. However, even annual inflation of a few percentage points can add up over the long term. Consider that an average annual inflation rate of only 3 percent would lead to a doubling in prices over a 24-year period.
Hopefully you’ll see growth in your retirement assets, which will allow you to increase your income over time. However, there may be times when your income doesn’t increase and you may need some additional funding help. An emergency reserve can come in handy to help you get through those periods in which your expenses are greater than you’d expected.
Ready to build your retirement emergency reserve? Let’s talk about it. Contact us at Carstens Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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