Retirement Planning

Your Emergency Fund in Retirement

Many Americans tap into retirement savings to cope with an emergency. What follows can be devastating. Read this article to better understand what an emergency fund can mean to your retirement.

Preserving Your Retirement Income with an Emergency Fund

We all understand the importance of having an emergency fund. However, more than 60 percent of Americans don't have enough readily available cash to tap into when an emergency strikes.1

Unfortunately, without an emergency fund, 29 percent of Americans are dipping into their savings, with 43 percent taking out two or more loans from their retirement plans, according to a recent survey by TIAA-CREF.2 Moreover, 44 percent of those surveyed were said to regret their decision to borrow from their retirement accounts.

The cost of borrowing against your future

For every dollar that's taken from your retirement plan is a dollar less that is earning you compounded interest and reducing what you'll ultimately have saved. But that's not all. Besides the obvious reduction in your retirement plan, borrowing from your 401(k) or other IRAs can be expensive due to early withdrawal penalties and fees. In fact, most government rules are designed specifically to discourage siphoning retirement accounts. For example, a withdrawal from your IRA before age 59 ½ will typically cost you a 10 percent penalty. So if you're in the 25 percent tax bracket and withdraw $5,000, you'd end up paying $1,750 in taxes and penalties.

Available options

If you find yourself in a situation where you need to take out a loan, there are many retirement plans that will waive early withdrawal penalties for life events such as buying your first home, paying for college, to cover specific medical expenses, health insurance costs, or if you become disabled. For more information on retirement plan loans and specific guidelines, visit the IRS website.

Build yourself an emergency fund

Before you borrow from your retirement savings, it's in your best interest to speak with a financial professional or retirement plan representative to discuss the possible long-term impact of taking out such a loan. They can also help you begin to establish and build your emergency fund.

Today, financial advisors typically recommend accumulating an emergency fund of at least six months' worth of living expenses. However, having just a $500 fund is a great start, providing you with some readily available cash to see you through many unexpected expenses. To help get you started in building an emergency money account, try using Bankrate's emergency fund worksheet or Money-Zine's emergency fund calculator.

Too many Americans are looking to their retirement loans to get out financial binds. Before this happens to you, be sure to weigh all of your options carefully before borrowing, and consult with a financial professional. Finally, don't delay building your emergency fund. The time to start is today!

1. http://www.bankrate.com/finance/smart-spending/money-pulse-0115.aspx
2. https://www.tiaa.org/public/about-tiaa/news-press/press-releases/pressrelease504.html

Was this article helpful?
1
2

Retirement Accounts

When it comes to unexpected expenses, you might be tempted to dip into or borrow against your retirement accounts. However, in doing so means you're borrowing against your future. Many people who borrow against their retirement accounts regret doing so. You can help eliminate the risk of having to borrow against your retirement accounts by establishing an emergency fund. This article can help you learn more about building an emergency fund so that you don't borrow against your retirement accounts. For more information on saving for retirement visit the Protective learning center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

WEB.1373.03.15