If you are part of the majority of Americans that has a retirement account in addition to your Social Security check, then you possess all you need to build an emergency fund.

                By                    Georgina Tzanetos

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The average 60-year-old has around $729,000 in their 401(k) with a 38-year contribution, according to Person Capital. The number might seem like much, but with rising inflation, higher costs of living and longer life expectancies than ever before, it can easily be whittled down.

If 2020 taught us anything, it was the importance of an emergency fund. Retirees have likely paid off or come close to paying off their primary residence and are ready to spend their golden years enjoying their hard-earned savings.

It’s important to reassess what it means to have a nest egg, though. The typical rule of thumb used to be 6 months of living expenses, but the pandemic has upended that recommendation. A pragmatic goal now is to have at least 9-12 months of living expenses put to the side. What do we actually mean when we say this?

For a retiree, it means a lot more. Calculate any outstanding mortgage payments, property taxes divided by the month, utilities, Medicare supplements, grocery expenses, car/gas expenses and a little extra. Then, multiply that number by at least 9. In the past, an advisor could easily advise a client that $50,000 was about the upper limit of what should be held in cash, as it truly does lose value the longer it sits dormant in a savings account. With the pandemic, however, that is a risk that needs to be taken, especially for retirees.

Let’s say that you do not have the roughly $50,000-75,000 in an emergency fund that you might need to stay afloat for a year. Here’s how to leverage your retirement investment accounts to get there.

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The single most important strategy for any retiree that has begun distributions is the toggling of different tax treatments. This includes your Social Security versus 401(k), 401(k) versus Roth IRA and so on. Your Social Security check comes after tax, meaning you keep all of what hits your account — and the same goes for a Roth. Your 401(k), however, shows you a balance on a screen that will be different once taxes are taken out.

A smart way to build an emergency fund is to draw down on both, but not all at the same time. Since the Social Security is after tax, it could be a good idea to put that directly into savings, then use your 401(k) distributions monthly for day-to-day expenses. This is wise because you are less likely to spend more of your 401(k) money than you are a Social Security check. You take a tax hit with every distribution from a 401(k), whereas a Social Security check is money right in the bank. Even if you need a portion of your Social Security check each month to supplement for living expenses, at least some of it could go immediately into savings.

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The same toggle can be done with a 401(k) and a Roth or annuity. The 401(k) can draw daily expenses, whereas the annuity or Roth distributions can go directly into a designated savings account and help pay for fixed bills and expenses.

Disclaimer: Many keep their money in their investment accounts, and while it is better to do this in the long run, the strategies above are for the purpose of building an emergency fund for unforeseen medical expenses or emergencies. Once that level is reached, it is always important and more beneficial to keep funds working and gaining in an investment account. Investment accounts are not liquid, which is why an additional emergency fund is of paramount importance.