How Much Emergency Savings People Over 50 Really Need

An emergency savings account can play an important role in long-term financial planning, but there is no single amount that works for everyone. The familiar guideline of setting aside three to six months of living expenses is a useful starting point, though some financial advisors say people nearing retirement should hold more.

That cushion matters even more if you are dealing with job insecurity or getting ready to leave the workforce entirely. The right goal depends on your finances, how long you have until retirement, and other personal factors.

Why the usual rule may not be enough near retirement

For many people who are close to retirement, the three-to-six-month benchmark may not provide enough protection because they are approaching a stage of life without a regular paycheck.

They may also be preparing for higher spending on travel and health care, both of which have been rising faster than overall inflation. On top of that, they may want to avoid being forced to sell investments when markets are down.

Targets that adjust with age

One approach is to set savings goals based on age. For example, having as much as 12 months of expenses saved between ages 50 and 62 may help bridge the gap until Social Security eligibility. If you stay employed past 62, you could delay claiming benefits and use savings for a while after retirement in order to secure a larger payout later.

People who retire early in their 60s may want to consider building a reserve equal to one to three years of expenses. That larger cash cushion can reduce the need to sell investments during a market slump.

As you age, it may also make sense to keep a separate emergency reserve for medical expenses. Health care bills can add up quickly, and it is difficult to know in advance how much money will be needed. Saving for that possibility can be better than being caught off guard.

Where to keep the money

A high-yield savings account is a practical place to hold emergency cash, and some accounts currently offer yields near 4%. Money market accounts can also pay more than standard savings accounts.

Both options provide easy access to your money, but their rates can change. If the Federal Reserve lowers rates, savings account returns can fall quickly. For that reason, some savers also use Treasury bills to lock in yields, although the money cannot be accessed until the bill matures.

One possible strategy is to keep enough cash in a high-yield savings account for immediate needs, giving you quick access to part of your fund. Any extra money can then be placed in a T-bill ladder to help lock in stronger rates.