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When To Use Your Emergency Fund

Unexpected medical bills? Yes. Disney World? No.


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This familiar message is etched across many fire alarms: in case of emergency, break glass.

But how, when and why should older folks “break the glass” of their personal emergency funds? For that matter, in an age of so many whiz-bang financial investment options, are emergency funds even relevant for folks 50 and up?  And who even has them?

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AARP went straight to the experts and asked financial gurus to offer their best tips for older folks on how to accumulate, invest and use an emergency fund.

“Too many seniors wait for a financial hurricane before they take action,” says Reed Markham, coauthor of Money 911: Tested Strategies to Survive Your Financial Emergency. “Preparation is your key to success when it comes to developing an emergency fund.”

Who actually has an emergency fund?  

For those age 50 and up, it’s typically those who work with a financial advisor, says Sandra Adams, a certified financial advisor in Southfield, Michigan. “The general population is bad at this,” she says. It’s particularly important to have an emergency fund as you get closer to retirement, she says.

When should I use an emergency fund?

In break-the-glass-worthy emergencies, of course.  These typically — but not always — are events that involve unexpected issues related to your health, home or car. 

“The focus is not so much on having money set aside to pay your bills if you lose your job, but how to tackle really big and unexpected bills,” says Mari Adam, a certified financial planner in Boca Raton, Florida.

Over the past 30 years, she says, the single most common big-ticket emergency need is for major dental bills. That’s because most dental procedures are not covered by Medicare, she says. She has one client who recently had to take $8,000 from their emergency fund to cover major dental work.

The second most common use for her clients — many of whom live on the South Florida coast — is for unexpected real estate assessments.  These typically happen when condo boards require residents to share the costs of necessary repair to buildings aged by climate and salt water on the coast. One of her clients recently had to withdraw $30,000 to cover such a real estate assessment.

How can I creatively use my emergency fund?

Sometimes, the way folks use their emergency funds can be quite savvy.  

For example, Brenna Baucum, a certified financial planner in Salem, Oregon, has a client who recently returned home from a month-long vacation only to discover their aging refrigerator had sprung a leak.  The good news: most of the damaged flooring, countertops and cupboards were covered. The bad news: they had to vacate the home and find a place to stay for several weeks while the kitchen repair work was done. So they made lemonade out of lemons. “Their emergency fund was the perfect pool to draw from to secure two weeks at a condo on the coast,” she says.

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So, yes, they used the money to go on another “vacation” — but it was the very same money that they would have had to spend to find a place to stay anyway while their home was under repair.

When not to use an emergency fund

First and foremost, never on wants, says Adams, the financial planner in Southfield, Michigan. “It shouldn’t be for wanting to buy a new outfit,” she says.

Nor should it be for a trip to Walt Disney World, says Mark Hamrick, senior economic analyst at Bankrate.

While most financial experts tend to discourage using emergency funds on travel, there can be exceptions. For example, Adam, the financial planner in Boca Raton, Florida,  has one elderly client who tapped their emergency fund to pay for a big family trip to Italy because that’s where the available cash — which has since been replaced — was sitting.

How big should your emergency fund be?

The appropriate size of an emergency fund depends on three elements: your monthly fixed expenses, monthly fixed income and your risk tolerance, says Baucum. The broad rule of thumb is to save three to six months of expenses, she says, but she has some clients who are more comfortable keeping 12 to 24 months in cash. “We talk about these three factors and determine the most appropriate savings and investing,” she says.

Adams estimates that most older folks who have emergency funds keep about $5,000 in them. Some of her elderly clients keep about $10,000 in their emergency funds, and a few keep up to $100,000.

It’s probably better to have too big an emergency fund than too small, says Hamrick. “I never met a person who told me they saved too much money,” he says. “Most people have a pretty good idea when they have more work to do with their emergency savings.”

Do retired folks face different emergency fund needs than those who still work?

For older working people who don’t yet collect money from Social Security or from a pension, an emergency fund provides a critical cushion if they lose income, says Adam.  Retired people typically have monthly income sources such as Social Security, so tapping the emergency fund isn’t so much about a sudden shortfall in income, but is due to an unexpected expense, she says.

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How do you start an emergency fund — particularly if you’re retired?

Ideally, it’s a byproduct of smart budgeting, says Hamrick. First, he says, you need to figure out roughly how much money you have coming in each month and how much you have going out.     

Next, suggests Jennifer Bush, a certified financial planner at Main Street Planning in Los Gatos, California, you need to set up a specific saving goal for the size of the emergency fund.  The key is to make saving a priority by cutting back on discretionary spending.  Most important of all, she says, is to avoid using the funds for nonemergencies.

How do you replenish it once you’ve tapped it?

Many elderly folks fund and replenish emergency funds by cutting back a bit on discretionary spending — like restaurant meals and travel expenses, says Hamrick. “Maybe you take a five-day trip instead of a 14-day trip,” he says.

How should you invest your emergency fund?

The overwhelming consensus is to keep emergency funds in some sort of easily accessible cash account. Adams suggests the funds should be placed in a savings account in an FDIC-insured bank — even if the interest is low. That’s because in an emergency, you want liquidity, safety and immediate availability.

Baucum says it’s very important to review the options for high-yield savings accounts because some are currently returning up to 5 percent interest. She notes that bankrate.com does a good job summarizing the latest yields each month.

Who should your emergency fund be for?

In most cases, your emergency fund is to cover emergency needs for you and your partner. But many folks also use the funds for emergencies that involve their children and even grandchildren, says Adams. She had one client whose grandchildren’s house burnt down; they needed a loan from them to pay for housing while their home was being repaired.

What’s the most surprising thing about emergency funds?

Perhaps the most surprising thing is how often the need for them comes up as folks age, says Hamrick.  “As we take on more complex lives and age — including by acquiring assets like a car and a house — these things all have surprise experiences (and costs) associated with them,” he says.

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