Why Emergency Savings Matter Most in Retirement

When you think about retirement planning, investments and pensions usually come to mind first. But there’s another piece of the puzzle that often gets overlooked: emergency savings. Without it, your long-term retirement plan can unravel quickly. A strong cash reserve is not optional, it’s a necessity for financial stability before and during retirement.

Why Emergency Savings Is Critical for Retirement

Research highlights a direct link between cash reserves and retirement success. Workers typically experience spending shocks every three months, such as car repairs or unexpected bills. Income shocks, like job loss, happen about once a year. Retirees, however, face fewer income shocks but more frequent and costly spending shocks often driven by unpredictable healthcare expenses.

Here’s the risk: without emergency savings, people dip into retirement accounts to cover short-term costs. That leads to tapping lines of credit, taking out loans, and making in additional taxable withdrawals, all of which can significantly derail retirement readiness. Households lacking savings are far more likely to take on debt or cut back on retirement contributions, making it harder to build long-term security.

The Debt Connection

The absence of emergency savings often shows up as debt. High-interest credit card balances are a dangerous substitute for an emergency fund. More than one in three Americans now have more credit card debt than savings. And among households that faced a financial shock, many turned to credit cards or loans when their cash reserves fell short.

This borrowing cycle adds stress and interest costs that compound over time exactly when households should be focused on building or protecting retirement funds.

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Key Statistics at a Glance

Source: Bankrate

Why Retirees Feel the Pinch

For retirees, the need for emergency savings is amplified. Spending shocks become larger and less predictable. Health care, long-term care, and even family support can trigger sudden expenses. Unlike workers, retirees don’t have the option of covering these costs with a new paycheck.

Instead, they’re forced to dip into investment portfolios. This creates a timing risk, pulling money from markets during downturns, locks in losses and undermines long-term sustainability. Having cash set aside provides flexibility, reducing the need to sell investments at the wrong time.

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Building a Strong Emergency Fund

So how do you build or rebuild emergency savings, especially when preparing for retirement?

Building a Strong Retirement Emergency Savings Infographic

Start with a dedicated account.

Open a separate savings account that is only for emergencies. Keeping this money apart from your everyday checking account makes it less tempting to dip into for non-essentials. Many people find it helpful to use a high-yield savings account, which offers some interest while still giving quick access when needed. The key is to create a clear boundary so the funds are mentally and physically separate from your daily spending.

Automate contributions.

Consistency is what builds an emergency fund, not occasional large deposits. Set up an automatic transfer on payday, even a small amount like $25 or $50 adds up over time. Automation also removes the temptation to skip saving in favor of other expenses. Think of it as paying your future self first before spending on anything else.

Target three to six months of expenses.

A good rule of thumb is to have enough to cover basic living costs for three to six months but the specific target for each person varies with their situation. If you have a stable job and steady income, three months may be enough. If your income is irregular, you are self-employed, or you are nearing retirement, aim for closer to six months. Retirees, who face more health-related expenses, should lean toward the higher end. Calculate this number based on your actual monthly bills such as housing, utilities, groceries, and insurance, not extras.

Protect retirement accounts.

It may feel easy to dip into a 401(k) or IRA during an emergency, but that decision comes with potential penalties, taxes, and the loss of long-term growth. Treat retirement savings as untouchable for short-term needs. By having a cash buffer in place, you reduce the risk of raiding your retirement accounts and undermining your future security.

Review regularly.

Your expenses today will not look the same in five years. Inflation, lifestyle changes, or new obligations can shift how much you need in reserves. Review your emergency fund at least once a year. If your monthly costs have gone up, adjust your target. Major life changes such as moving, marriage, children, or retirement are also good checkpoints to revisit your savings goal.

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The Bottom Line

Emergency savings may not be as exciting as investment strategies or Social Security planning, but they are just as important. Without a cash buffer, retirement plans are fragile.

Think of emergency savings as insurance for your financial future. It protects your retirement accounts from early withdrawals, reduces reliance on debt, and gives you confidence to handle life’s surprises. Whether you’re still working or already retired, building and maintaining this cushion is one of the smartest financial moves you can make.

Reference

J.P. Morgan Asset Management. (2025). Guide to Retirement. Retrieved from https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/retirement-insights/guide-to-retirement-us.pdf

Bankrate. (2025, June 26). Annual Emergency Savings Report. Retrieved from https://www.bankrate.com/banking/savings/emergency-savings-report/#tips-on-building-your-emergency-fund

Despard, M. R., Friedline, T., & Martin-West, S. (2020). Why Do Households Lack Emergency Savings? The Role of Financial Capability. Public Library of Science, PMC7236434. Retrieved from https://pmc.ncbi.nlm.nih.gov/articles/PMC7236434/