Rainy Day Fund
More and more people are taking the decision to retire early but how much should you be setting aside if the unexpected happens? Here are some handy tips to help you build up a financial safety net for emergency expenses.
Many people know it’s wise to keep an emergency savings pot to cover the bills and core living costs for at least a few months, in case something unexpected happens, or if you suddenly need to cover some important repairs.
But how much money should you be keeping in your emergency pot in retirement? It may be more than you think.
One in 12 (8%) retirees could cover the essentials for less than a month from their savings, and another one in six (16%) could cover between one to three months’ worth, financial services provider Hargreaves Lansdown recently found.
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, says as a rough rule of thumb, people should have three to six months’ worth of essential expenses set aside in a competitive easy-access account.
But it is worth remembering that after you retire, this actually grows to one to three years’ worth of savings, she says.
Many people may think they need a smaller emergency pot in retirement, with – hopefully – the mortgage having been paid off , and the children all grown and having flown the nest.
But Coles says that as those who have ended work can’t meet emergency costs out of future earnings, it’s vital they have an adequate financial safety net to deal with the unexpected.
Coles shares the following top tips to help retirees build up a bigger emergency savings pot…
1>> Calculate what your annual expenses are likely to look like – focusing only on the essentials.
2>> Consider any existing sources of this money. You might be able to access tax free cash from your pension, or have Isas set aside. If you’re planning to downsize, you could consider putting the fi rst chunk of this money aside as emergency savings.
3>> If you need to save from your income, look at what you have coming in and what you are spending, and see whether it’s possible to free up cash.
4>> If your budget is too tight to save, and you’re early on in your retirement, paid employment might be an option. It doesn’t need to look anything like your previous job. Some people can make money from the skills they’ve built up over the years, such as DIY or gardening.
5>> Consider whether your home could help produce extra income. You might be able to rent out a room for a period, or your drive or storage space