Suze Orman always suggests having enough money in your emergency savings fund to cover your expenses for eight to 12 months. While that advice may still make sense to many retirees, you shouldn’t automatically assume it’s the best option for you.
Some retirees may need to have even more money set aside while others – including those with predictable income streams and who may rely less on emergency funds – may need less. Where maintaining your emergency savings is also important. Traditional savings accounts earn very little interest, and it’s important to grow your money even after you retire.
Why the common law 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.
Retired people probably no longer worry about losing their money suddenly due to unemployment. They may also have new income streams, such as Social Security and pensions. Depending on their situation, Orman’s rule may not apply to them. On the other hand, many financial advisors say to accumulate cash-like savings for one to three years to cover unexpected health bills and other expenses that may arise if you no longer have a recurring payment.
It’s important to consider your own situation and decide what makes sense for you.
Where can you keep the savings
You don’t need all your money in a high-yield savings account, but it’s still good to have liquid cash. Taking a layered approach to your liquidity can increase 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 more accessible but effective assets such as money market funds, Treasurys and certificates of deposit (CDs) with shorter maturities. From there, you can continue to invest money not in your emergency fund in other bonds and stocks.
Having more assets that grow over time will better prepare you for a real risk in retirement: big, unexpected expenses like medical expenses or home repairs.
Why too much money is dangerous
Although money seems like a 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 exceed inflation.
Assets such as stocks and precious metals offer investors the opportunity to beat inflation and build wealth.
Application
Financial change doesn’t happen overnight, but a few simple steps can get you closer to your long-term financial goals. The easiest step you can take is to move idle money from your checking account to a high-yield savings account. It makes sense to find savings accounts with 3 percent to 4 percent annual yields (APYs), especially if you’re expanding your horizons in online banking.
After that, you can set a goal of how much money you want to save in the emergency fund. That way, you can invest in multiple properties while knowing you have enough cash available for big surprise expenses. Review your overall income picture each year and monitor how much you can quickly access without penalty costs, and make sure you’re still exposing your portfolio to growth potential.
