Suze Orman has regularly suggested having enough money in your emergency savings fund to cover your expenses for eight to 12 months. While that advice may still make sense for a lot of retirees, you shouldn’t automatically assume it’s the best choice for you.
Some retirees may need to have even more cash set aside and some — including those who have predictable income streams and may be less reliant on emergency funds — may need less. Where you keep your emergency savings also matters. Traditional savings accounts earn very little interest, and it’s important to grow your money even after you stop working.
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Why the standard rule may not apply
Orman’s rule of saving enough money for your essentials for eight months to one year is for people of all walks of life. But retirees need to think about their unique positions.
Retirees likely are no longer worried about suddenly losing their income due to becoming unemployed. They also may have new income streams, such as Social Security and pensions. Depending on their situation, Orman’s rule of thumb may not apply to them. On the other hand, many financial advisors say to bump up cash-like savings to one to three years to account for the potential for surprise health bills and other costs that can pop up when you no longer have a steady paycheck.
It’s important to consider your personal situation and determine what makes sense for you.
Where to keep savings
You don’t need all of your money in a high-yield savings account, but it’s still good to have some liquid cash. Taking a tiered approach with your liquidity can boost your cash flow and result in higher yields. For example, the first tier could be a high-yield savings account that can hold up to six months of your living expenses. Then, the remaining funds can go into accessible but working assets like money market funds, Treasuries and certificates of deposit (CDs) with short-term maturities. From there, you can keep investing the money not in your emergency fund to other bonds and stocks.
Having more assets growing over an extended period of time will better prepare you for the real risk of retirement: a large, unexpected expense like medical bills or home repair.
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Why too much cash is risky
While cash seems like the safe option, it actually comes with risk. Inflation eats away at your purchasing power over time, which is why it’s important to have at least some of your money in investments that can generate returns that beat inflation.
Assets like stocks and precious metals give investors the opportunity to outperform inflation and build wealth.
The action plan
Financial transformations don’t happen overnight, but a few simple steps can move you closer to long-term financial goals. The easiest step to take is to move idle cash from your checking account to a high-yield savings account. It is realistic to find savings accounts with 3% to 4% annual percentage yields (APYs), especially if you expand your horizon to online banks.
After that, you can set a goal of how much money you want saved in an emergency fund. That way, you can invest in more assets while knowing you have enough money available for a significant surprise expense. Review your total liquidity picture each year and monitor how much you can access quickly without penalty fees, and make sure you’re still exposing your portfolio to growth potential.
