You may not automatically think “emergency fund” when you are planning for retirement and saving for the long-term, however, saving for an emergency fund can help you protect your future investment. Below are three reasons having an emergency fund can be an important part of your retirement plans.
Staying on track: Having an emergency fund set aside for unexpected expenses will help you stay on track with all your financial goals. If you find yourself in a situation where you need money for a car repair, vet bill, or other expense and have no emergency fund to draw from, taking money from your savings or retirement accounts or taking out a loan could derail your other plans, like paying down debt or saving for retirement. Start with $500 in a liquid savings account that is easily accessible and then continue to build those funds to cover 3-6 months in living expenses.
Avoid drawing retirement funds early. For example: let’s say you have a small nest egg in your Thrift Savings Plan (TSP) and you find yourself in need of cash – you may be able to take a loan out of the TSP. However, it could take years to rebuild the funds withdrawn from your investment account and you will lose potential growth on the funds you removed. This could take years to recover from. Having an emergency fund could help avoid this situation.
Increased overall financial health. Having an emergency fund, paying down debt, and saving for retirement are three important parts of overall financial health. When you look forward to retirement you can consider yourself in very good shape if you have little/no debt, an emergency fund with 6 months or more of cash on-hand and the combination of your investments, social security and possibly retired pay.
Getting into the habit of saving for unexpected expenses, saving for retirement and paying down debt will go a long way to get you well-prepared for retirement.
Saving for emergencies is one part of retirement savings and overall financial health, stay tuned for our next segment on debt repayment. Follow our series – The DoD Blended Retirement System: Leading up to the Decision.