Life has a funny (OK, not so funny) tendency to throw unwanted surprises our way, and many of those surprises are financial in nature. You never know when your roof might spring a leak, your car might break down, or your clumsiness might land you in the hospital with a broken leg and a whopping bill.
That's why we all need emergency savings for protection against life's unknowns. Working Americans are generally advised to have an emergency fund with enough money to cover three to six months' worth of living expenses. The logic is that this type of cushion could conceivably not only pay for an unplanned bill but an extended period of unemployment.
But what if you're retired and therefore aren't used to collecting a paycheck? You still need emergency savings, but is it really necessary to sock away six months' worth of expenses in a bank account? The answer is: It depends on what your spending looks like and how much peace of mind you're after.
IMAGE SOURCE: GETTY IMAGES.
Emergency savings: A must for retirees
The purpose of an emergency fund is to bridge the gap when a paycheck alone won't suffice in covering whatever financial situation is at play. But when you're not getting a paycheck anyway, what your emergency fund really does is offer protection against having to sell investments at a loss.
Many retirees live off their Social Security income coupled with their IRAs or 401(k). If you're one of them, you're no doubt aware that your IRA or 401(k) shouldn't just be sitting in cash; rather, it should stay invested in stocks and bonds to generate more income during your golden years. The problem, however, is that market conditions can cause the value of your investments to go up or down. And in the latter scenario, needing money for an emergency could result in major losses if you're forced to liquidate assets at a time when they're worth less than what you paid for them.
That's why you need an emergency fund in retirement -- to avoid having to take losses that upend your finances. Whether you really need up to six months' worth of living expenses in the bank, however, hinges on what your current costs look like. If you own a home and a vehicle, and you have a host of health issues that tend to land you in the hospital, then having a six-month cushion isn't a bad idea. On the other hand, if you're a renter who relies on public transportation, it means that other than healthcare, you can generally avoid financial surprises that throw your budget off course. In that case, a three-month emergency fund will likely suffice, keeping in mind that you'll also (most likely) have regular Social Security payments coming in, which are guaranteed income.