If retirement is on the horizon, you might already be planning, strategizing, and dreaming about everything you’re going to do once you no longer have to report to a job. Far be it from me to add to your to-do list, but have you given any thought to the state of your savings? Boring topic, I know — but absolutely essential once you’re on a fixed income.
Keep reading for more details about how much money you should keep in the bank — as well as a few great bank account options to keep your cash safe and at the ready.
More than a traditional emergency fund
The usual recommendation for an emergency fund if you’re still in the workforce is enough money to cover three to six months’ worth of expenses. This amount is intended to get you through a period of unemployment, as well as cover an unplanned expense, such as a car repair or a medical bill that your insurance doesn’t cover in full. But if you’re not working anymore, you should target a bigger amount. In fact, keeping a full year’s worth of predictable expenses in the bank is generally considered a good idea.
Building up a year’s worth (or potentially more) of a cash cushion to protect that retirement account balance you worked so hard to build makes good sense. Just as you’re not likely to succeed in timing the market when you buy stocks, the same is also true when it’s time to sell investments and take out your cash. No one can predict what the market will do, and if you’ve got enough cash on hand to ride out some low periods, you have a better shot of not having to sell investments at a loss.
How do you decide how much money constitutes a year of expenses? Sit down with your budget and figure out how much all your bills are going to cost you, as a first step. Then consider expenses like travel, which you may be doing more of now that you’re retired, and build that into a prospective year of costs. Finally, pad your estimates to ensure you have enough to cover any unplanned bills that could pop up, like a home or car repair.
Take advantage of today’s higher rates
If you’re going to keep a full year (or more) of predictable expenses at the ready, don’t assume you’re safe to just chuck it into any old savings account and call it good. Don’t keep it in your checking account, either — not only will it be more difficult to keep track of your spending, but your cash is likely to lose value thanks to inflation.
Rates on interest-earning accounts are up across the board right now, since the Federal Reserve has raised the federal funds rate repeatedly to fight inflation in the wake of COVID-19. So where is the best place for your cash? Consider the following account types.
High-yield savings accounts
HYSAs are simple bank accounts, but this makes them easy to use and a real asset for your retirement strategy. The best savings accounts are paying 4% or higher APY right now. Link a checking account to one to give yourself easier access to your money when you need it.
Certificates of deposit
Certificates of deposit (CDs) let you lock in one of those high rates (as much as 5% these days) for a set period — but in exchange, you have to leave your money alone for the duration of the CD term or pay a penalty. Consider building a CD ladder to have money freeing up on a predictable schedule.
Money market accounts
MMAs are like a hybrid of checking and savings accounts — they come with the higher rates of a savings account but the easier accessibility of checking. Many money market accounts come with check-writing capabilities and debit cards.
When you’re retired, you have to be a lot more careful about financial planning — after all, you won’t be earning a regular paycheck you can count on anymore. Think long and hard about how much money you’ll need to get you through an average year, and use an interest-earning and FDIC-insured bank account to keep that money from losing value to inflation.
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