Retirement Emergency Fund: Why It's Still Essential

You know how important it is to build an emergency fund while you're working. But here's what you might not know: You need to keep that emergency fund well-stocked with savings even after you retire.

An emergency fund might be even more important once you leave the working world. You won't have a regular salary to fall back on in retirement if an unexpected expense pops up. One costly car repair or medical bill can set you back and cause a lot of financial problems.

While you're working, you should keep anywhere from six months' to a year's worth of daily living expenses in this fund. That way, if you lose your job, you'll have money available to pay your daily living expenses while you search for a replacement. You need to do the same during your retirement.

How an emergency fund changes in retirement

Social Security payments often complicate the emergency fund equation in retirement. That's because you are guaranteed these payments each month. When you're working, there is always a danger that you'll lose your job and your paycheck will disappear. That won't happen with your Social Security benefits. An emergency fund won't ever have to replace this source of income.

By the time you reach retirement, you should also know how much other income you can rely on each month. Most of this will probably come from the retirement savings you've built up over time. You should have created a retirement budget listing how much money you'll have available each month when factoring in withdrawals from these savings and Social Security payments. (See also: Here's How You Should Budget Your Social Security Checks)

What you might not be as certain about are your monthly living expenses. Retirement isn't cheap, and that's where an emergency fund comes in. This liquid savings can help you cover unexpected emergencies that could otherwise break your monthly budget.

The challenge, of course, is in estimating how much you should keep in that fund at any given time. There is no magic formula. And how much you'll need depends largely on your health and your housing situation.

The costs of retirement

The most recent Merrill Lynch Finances in Retirement Survey says that the average cost of retirement is $738,400.

A good chunk of that cost can be attributed to health care. A recent report from Fidelity found that a healthy 65-year-old couple retiring in 2017 could expect to pay $275,000 throughout their retirements in health care and medical expenses. That figure is rising, with the number 6 percent higher in 2017 than it was a year earlier. (See also: Here's How Far $1 Million Will Actually Go in Retirement)

The challenge with health care costs is that you can't control them. You might be healthy when you hit retirement, but there's no guarantee that your health won't decline. Without an emergency fund to cover unexpected medical bills, you risk wiping out a huge chunk of your retirement savings that may be budgeted for other things.

Then there's housing. You might have paid off your mortgage and plan to remain in your home. That's ideal … for now. As you age, you might need assisted living, which certainly isn't inexpensive. And if you enter retirement with a monthly mortgage payment, that can be a huge expense.

Even if you do live in your current home without a mortgage payment, you can still expect to pay for property taxes, repairs, and maintenance. And if your home has aged along with you, chances are it may take some extra TLC (and cost) to be maintained. (See also: 9 Unexpected Expenses for Retirees — And How to Manage Them)

This is why it's so important to maintain an emergency fund in retirement. Much like when you were working, your goal should still be to keep that fund stocked with enough to cover six months' to a year's worth of daily living expenses in case the worst should happen.