Why your retirement savings shouldn’t be your emergency fund

Life happens. Cars break down. Ankles get sprained. There will always be “emergencies” that can set you back financially, but you don’t want to compound the damage by tapping your retirement savings to pay for them. 46 million Americans—say they’ve wiped out their emergency savings since the start of the pandemic, according to CNBC + Acorns Invest In You savings survey — that’s 14% of Americans.1 Your retirement savings is there for one thing: retirement. Anything else you do with it will affect your long-term goals and your ability to live the way you want to when you reach your golden years.

Withdraw money and it’s gone

Retirement savings can be tax-efficient, depending on the type of account. But withdrawals from these accounts can have tax ramifications that need to be taken into account. For example, withdrawals from individual retirement accounts before age 59 1/2 typically trigger a 10 percent early withdrawal penalty, in addition to ordinary income tax you may owe.  It may not seem like a big deal when you need cash now, but that money you took out is gone and so is all the gain it could have potentially earned by staying invested.

It could leave you short if the unexpected happens

In a perfect world, you will work for as long as you want and then go off into retirement when you are ready. Unfortunately, for many people, that doesn’t happen. An illness or unexpected injury can force someone to exit the workforce earlier than planned. And if that person was using their retirement savings as a piggy bank to cover emergencies, they’re going to be in an even more precarious position. According to Fidelity, a 65-year-old, opposite-gender couple retiring this year can expect to spend $300,000 in health care and medical expenses throughout retirement.2 Let your retirement savings grow, and it will be there to help cover those costs.

You pass on your problems to your children

For savers, amassing enough money to live off of in retirement means they won’t have to burden their adult children if they get sick or have other emergency needs. But if their savings are used for emergencies before they retire, seniors may be forced to turn to their children to help in a crisis. That, in turn, could put pressure on their adult children’s ability to save, thus creating a vicious cycle.

Bottom line

What you put away for retirement today is going to have a big impact on your life once you exit the workforce. It’s not far-fetched to live 30 years in retirement, which means you are going to need a nest egg that can help you throughout this lengthy period. While it may be tempting to tap into that nest egg for emergencies when retirement is years away, make every effort to fight that urge.  Retirement savings should be just that — for retirement — and shouldn’t be used to cover costs today.

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1 https://www.nbcnews.com/know-your-value/feature/46-million-americans-wiped-out-their-emergency-savings-during-pandemic-ncna1254073

2 https://www.businesswire.com/news/home/20210507005403/en/Fidelity%E2%80%99s-20th-Annual-Retiree-Health-Care-Cost-Estimate-Hits-New-High-A-Couple-Retiring-Today-Will-Need-300000-to-Cover-Medical-Expenses-an-88-Increase-Since-2002


Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.