MONEY early retirement

Do This If You Want to Retire Early

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I’m married, and we are in our early to mid-50s with just under $700,000 in savings. My husband makes around $55,000 a year, and I make $135,000 a year. We would really like to retire before 65 (our full retirement age for Social Security is 67). I have a pension that will pay out $1,132 a month with a 50% survivor’s benefit for my husband. But we’re not sure whether we can pull it off. I max out my 401(k) but never seem to have any extra money to put into savings. How we can get to where we want to be? – Elizabeth, Lisle, Illinois

A: Achieving your dream of early retirement may be doable. But you’ll need to step up your savings and control your expenses, says Ray Lucas, senior vice president of planning at of Integrated Financial Partners. “It all comes down to the lifestyle you want to lead,” says Lucas.

First, let’s take a look at where you are now. If you are saving the max amount of $18,000 annually in your 401(k)—not including catch-up contributions, which we’ll get to in a moment—that’s 13% of your salary or 10% of your combined incomes. If you continue saving at that rate and get a 6% annual rate of return, you’d have about $1.1 million in five years at age 60.

That sounds like a tidy sum, but it may not go as far as you think over a long retirement. Let’s assume you want to replace 75% of your pre-retirement income, which would come to $140,000. It helps that you have a pension that will give you $13,000 a year. And there’s also Social Security—the average annual benefit for a couple who claim at full retirement age is $25,000 a year. But to provide an additional $100,000 in annual income, you will need to save at least $3 million. Assuming a 3.5% withdrawal rate, that portfolio would likely last you until age 95, or 35 years.

Even if you wait till 65 to retire, you are on track to amass “only” $1.6 million. So you will need to dramatically boost your savings rate to meet those goals, says Lucas. That may be tough since you say you are already have trouble putting away more.

But even if you can’t reach those savings targets, you may be able to enjoy a comfortable lifestyle on less than a six-figure income—most people do. In which case an early retirement is still very possible.

The first step is to analyze your retirement spending needs. Start by completing an expenses worksheet such as this one, which covers everything from your mortgage and property taxes to eating out and buying groceries. Be sure to factor in health care costs too. You can’t enroll in Medicare till you’re 65, so if you retire earlier, you will need to buy private health insurance for a few years. Also take into account whether you will be helping anyone else out financially, such as children or an elderly parent.

Next, make a full assessment of all your sources of income. Use a retirement calculator to see how much income your savings and pension will provide based on the year you want to retire. And be sure to consider the best possible claiming strategies for Social Security—married couples often have more options for taking Social Security, such as file-and-suspend, which can boost their income. The Social Security calculator available online at Financial Engines will run thousands of scenarios to help you identify the best choices.

And even though you may find it difficult, look at ways to increase your savings. In your 50s, you can make catch-up contributions to your 401(k), which can raise your total savings to $24,000 a year. Be sure to jump on opportunities to do bursts of savings—socking away big chunks of money when large expenses fall away, such as paying for college for your kids. And practice now for retirement by living on a smaller budget, which will enable you to sock away more.

If none of this gets you closer to your goals, consider working another year or two or taking on a part-time job after you retire. Another smart move may be to downsize to a smaller home or relocate to a lower-cost area, which will enable you to build your portfolio—plus, the lifestyle will be easier on your budget after you stop working.

“Retiring early often means making trade-offs, now and later,” says Lucas. “But with smart planning and disciplined saving, you can make it a reality.”

Want to fast-track your retirement savings? Check out MONEY’s Ultimate Retirement Guide

MONEY Retirement

Why Keeping Your Retirement Funds In One Place Pays Off

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am retired with the majority of my assets in IRAs. For a sense of security I have kept my money in several accounts, with Fidelity and Vanguard. They’re far from a Bernie Madoff risk, but I figure why not spread it around just in case? I also worry about a cyber-attack on the holder of all my assets. Am I being too paranoid or could I safely consolidate all my eggs into one basket? — Bob Drahushuk

A: There are plenty of good reasons to consolidate your investments at one firm rather then spreading them over multiple accounts, says Mark Hebner, founder and president of Index Fund Advisors in Irvine, Calif. You’ll find it easy to ensure that you have the right asset allocation, you can save on administrative fees, and some firms reduce transaction costs for larger balances. It means less paperwork, and you have just one firm to deal with when you want to make a transaction. It’s also simpler for your spouse and heirs when you pass away.

But if splitting your investments between two brokerages will give you peace of mind, do it, says Hebner. There’s no harm. You can use an account aggregator such as Mint.com or Quicken to keep tabs on your overall portfolio, he adds.

As for the risk of losing your money in a Madoff-like Ponzi scheme, keeping your money at large, well-respected brokerages, as you are doing, will mitigate that. You aren’t alone, though, in your concerns about cyber attacks on financial institutions. The Securities and Exchange Commission has beefed up its examination of brokerage cyber security policies. But most large firms, including Fidelity, Vanguard, and Schwab, have policies that guarantee reimbursement against unauthorized activity in your account.

Beyond Ponzi schemes and hackers, Hebner says that since the 2008 market crash, clients worry more about the risk of brokerage firm failing. You have protection there too.

The Securities Investor Protection Corp. (SIPC) steps in if a brokerage goes out of business and will reimburse your account up to $500,000 per account holder and per account (coverage of cash is $250,000). In the Madoff case, customers got money back that they deposited with him but not any of the fictitious profits Madoff claimed, says Steve Harbeck, SIPC president and CEO of SIPC, which is a non-government organization funded by member securities firms. “We protect cash deposited with an institution and any securities bought with that money for member brokerages.”

Brokerage bankruptcies are rare, though—just 328 cases since SIPC was created in 1970 and 625,000 customer claims. The SIPC has reimbursed $2.34 billion in claims and administrative costs, but that number is skewed by Madoff, which accounts for $1.8 billion of the $2.34 billion. Not including the continuing Madoff case, fewer than 400 people haven’t received the full amount of their assets left with a collapsed SIPC-member firm because it was above the limit, according to SIPC. But most major brokerage firms also carry private insurance beyond SIPC limits known as “excess SIP insurance.”

That should give you peace of mind whether or not you consolidate your accounts, says Hebner. But do whatever helps you sleep at night.

“There’s enough to worry about when it comes to the ups and downs of the financial markets. You should feel as comfortable as you can about any possible risks to your account,” says Hebner.

MONEY Retirement

The Right Way to Lower Your Tax Bill on an Inherited IRA

Doing taxes
Getty Images

Q: My dad has a traditional IRA with non-deductible, after-tax contributions. He has to figure out the taxable and non-taxable portion of the distribution every time he withdraws money. I will inherit the IRA when he passes away. As the beneficiary, do I need to do the same thing when I take distributions? – Max Liu, West Hills, Calif.

A: Yes, you will have to do the same thing your father does or you’ll end up paying more taxes than necessary when you take the money out, says Jeffrey Levine, a CPA and IRA technical consultant at IRAHelp.com.

Here’s why: You can’t deduct your IRA contributions on your taxes if you already participate in an employer-sponsored retirement plan such as a 401(k) and earn more than $71,000 as an individual or $118,000 as a married couple. But you can still contribute up to $5,500 a year in 2015 ($6,500 if you’re 50 or older) to a non-deductible IRA.

When you fund a non-deductible IRA, as your dad has done, you have already paid income taxes on that money. Unfortunately, the onus is on you, the account holder, to show the IRS that the taxes have been paid. You do that by filing IRS form 8606 each year you make after-tax IRA contributions. (The institution where you keep your account won’t keep track.)

If you don’t, the IRS has no record that you ever paid taxes on money in your IRA. But even if you do the paperwork properly upfront, you must file form 8606 again when you take withdrawals to prove that you already ponied up to Uncle Sam.

Though many rules are different when you inherit an IRA (more on that later) vs. funding one yourself, in this case the process is very similar for IRA beneficiaries, says Levine.

When you inherit an IRA that holds after-tax contributions, you must also file Form 8606 to claim the non-taxable part of the distribution, even if your dad already did. If you don’t, you’ll essentially be paying taxes on money that’s already been taxed. It’s even more complicated if you also have your own IRA with after-tax funds. You have to file two 8606 forms, one for your own IRA and one for your inherited IRA, says Levine. But it’s worth the effort.

“Taxes are bad enough to start,” says Levine. “There’s no reason anyone should pay more than they should just because of poor record keeping.”

You might wonder why anyone would make contributions to an IRA when you can’t get a tax break and all that paperwork is involved. After all, even when people qualify for tax breaks, not a lot of money is flowing into IRAs on a regular basis. But making non-deductible contributions still has benefits. Your investment grows without the drag of taxes, and you don’t pay tax on earnings until you withdraw them.

Keep in mind that when you inherit an IRA, a lot is different from when you own an IRA that you opened yourself. You can’t contribute new money to an inherited IRA and you can’t roll it into another IRA. Unlike regular IRA holders, who don’t have to start taking distributions until after age 70½, you generally have to begin taking money from the account the year after you inherit it.

It’s not wise to withdraw the money all at once though, says Levine. “Many people take the money and run. But that money is immediately taxable, and the income could phase you out of other tax breaks.”

You can reduce the tax hit by taking money out over time. The IRS requires you to withdraw a minimum amount based on your age and the year you inherit the money. You can use a calculator like this one to figure out the annual minimum. If you don’t take at least that much, you’ll be hit with a penalty. Plus, the longer you keep money inside the IRA, the more you benefit from the tax-deferred growth, adds Levine.

This can be complicated stuff, so you may want to consult with a tax expert or financial adviser who has experience in this area.

It’s terrific that your father has been diligent about his record keeping and taxes. To make the most of his legacy, you’ll have to be too.

MONEY Workplace

How to Stand Out in an Office Meeting

Meetings at work are a necessary evil. These rules will help you make the most of them.

Just because everyone complains about meetings doesn’t mean you can’t shine in one. Here are some tips to make sure you stand out (but not too much) in a meeting at work.

Try not to interrupt. Interrupting may make you come across as a blowhard.

Don’t be a wallflower either. You were invited to the meeting for a reason; make sure you contribute to the conversation.

Do some prep work. Have some talking points prepared.

Lean in. You’ll look more confident and more involved that way.

Try to sit across from the most important people in the room. When they look up from their notes, you’re the person they see.

Don’t undermine yourself. Phrases like “this is just my opinion but…” are not your friends. Speak confidently.

Be one of the first people to speak. This will help calm your nerves, and you won’t have to worry about someone else taking your ideas.

Read the body language. Are people checking their phones or drawing on their notepads? Maybe it’s time to sit down and shut up.

MONEY Roth IRA

Here’s the Best Way to Invest a Roth IRA in Your 20s

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I just rolled over a Roth 401(k) from my previous employer into a Roth IRA. How diversified should my Roth IRA investments be? How do I select the right balance being a 28-year-old? – KC, New York, NY

A: First, good for you for reinvesting your retirement savings. Pulling money out of your 401(k) can do serious damage to your retirement prospects—and that’s a common mistake that many people make, especially young investors, when they leave their employers. According to Vanguard, 29% of 401(k) investors overall and 35% of 20-somethings cashed out their 401(k)s when switching jobs.

Cashing out triggers income taxes and a 10% penalty if you’re under 59 ½. And you lose years of growth when you drain a chunk of savings. Cash-outs can cut your retirement income by 27%, according to Aon Hewitt.

So you’re off to a good start by rolling that money into an IRA, says Brad Sullivan, a certified financial planner and senior vice president at Beverly Hills Wealth Management in California.

At your age, you have thirty or more years until retirement. With such a long-time horizon, you need to be focused on long-term growth, and the best way to achieve that goal is to invest heavily in stocks, says Sullivan. Over time, stocks outperform more conservative investments, as well as inflation. Since the 1920s, large cap stocks have posted an average annual return of about 10% vs. 5% to 6% for bonds, while inflation clocked in at 3%.

Granted, stocks can deliver sharp losses along the way, but you have plenty of time to wait for the market to recover. A good starting point for setting your stock allocation, says Sullivan, is an old rule of thumb: subtract your age from 110 and invest that percentage of your assets in stocks and the rest in bonds. For you, that would mean a 80%/20% mix of stocks and bonds.

But whether you should opt for that mix also depends on your tolerance for risk. If you get nervous during volatile times in the stock market, keeping a higher allocation in conservative investments such as bonds—perhaps 30%—may help you stay the course during bear markets. “You have to be comfortable with your asset allocation,” says Sullivan. “You don’t want to get so nervous that you pull your money out of the market when it is down.” For those who don’t sweat market downturns, 80% or 90% in stocks is fine, says Sullivan.

Diversification is also important. For the stock portion of your portfolio, Sullivan recommends about 70% in U.S. stocks and 30% in international stocks, with a mix of large, mid-sized and small cap equities. (For more portfolio help, try this asset allocation tool.)

All this might seem complicated, but it doesn’t have to be. You could put together a well-diversified portfolio with a few low-cost index options: A total stock market index fund for U.S. equities, a total international stock index fund and a total U.S. bond market fund. (Check out our Money 50 list of recommended funds and ETFs for candidates.)

Another option is to invest your IRA in a target-date fund. You simply choose a fund that’s labeled with the year you plan to retire, and it will automatically adjust the mix of stocks, bonds and cash to maximize your return and minimize your risk as you get older.

That’s a strategy that more young people are embracing as target-date funds become more available in 401(k) plans. Among people in their 20s, one-third have retirement savings invested in target-date funds, according to the Employee Benefit Research Institute.

Keeping your investments in a Roth is also smart. The money you put into a Roth is withdrawn tax-free. What’s more, you’re likely to have a higher tax rate at retirement, which makes Roth IRAs especially beneficial for younger retirement savers.

Still, you can’t beat a 401(k) for pumping up retirement savings. You can put away up to $18,000 a year in a 401(k) vs. just $5,500 in an IRA—plus, most plans offer an employer match. So don’t hesitate to enroll, if you have another opportunity, especially if the plan offers a good menu of low-cost investments.

If that’s the case, look into the possibility of a doing a “reverse rollover”: transferring your Roth IRA into your new employer’s 401(k), says Sullivan. About 70% of 401(k)s allow reverse rollovers, according to the Plan Sponsor Council of America, and a growing number offer a Roth 401(k), which could accept your Roth IRA. It will be easier to stay on top of your asset allocation if you’ve got all your retirement savings in one place.

Read next: This Is the Biggest Mistake People Make With Their IRAs

MONEY Workplace

How to Quit Your Job Gracefully

There's a right way and a wrong way to head out the door.

So you’ve got a new job, and you’ve got to leave your current one. There are a few things you need to do before up-and-quitting:

Make sure you tell your boss first. Your direct supervisor should be the first to know. It may be tempting to talk to your close friends and colleagues, but hold off because word spreads quickly.

Give at least two weeks’ notice. The old adage of giving two weeks’ notice may actually be required by your company. If you’re in a higher-up position—you’re senior management or you supervise a lot of people—it’ll be harder to replace you, so give three or four weeks’ notice.

Thank your colleagues. When you thank them for being a fun bunch to work with, use the opportunity to leave your contact information. Your colleagues are your network, and you never know when you may need them for a reference or a job in the future.

Document exactly how you do your job. Your successor will thank you for it. Within reason, offer to keep in touch to help acclimate him or her to the job.

Don’t slack off. No matter how tempting it is to come in late or leave early in your last few weeks at a job, work as hard as ever. You don’t want your last few days to leave a bad impression on your coworkers; that may come back to haunt you later.

MONEY Spending

Why You Should Spend More Money in Retirement

illustration of senior couple taking money out of purse
Jason Schneider

Money worries can make you unnecessarily frugal. Here's how to overcome them.

You’ve saved up money your whole career. So in retirement, don’t deny yourself the pleasure of spending it.

Not a problem, you think? Actually, it can be. In 2014, 28% of people 65 and older with at least $100,000 in savings pulled less than 1% from their accounts, reports the research firm Hearts & Wallets. That’s well below the 4% that many financial planners say is safe.

Misgivings about spending play a big role, says Hearts & Wallets partner Laura Varas. In focus groups, retirees described big spenders their age as irresponsible and expressed shame about their own spending. And as people age, they tend to get more emotional about complex money decisions, says Christopher Browning, a financial planning professor at Texas Tech University: “No one gives you instructions on how to turn your savings into income. It can be a paralyzing process.”

First determine if a shortage of money is the problem rather than an inability to spend. The tool at troweprice.com/ric can help you figure out whether you indeed have enough funds for a good retirement. Then, if it’s worry that’s stifling your spending, try these steps to put yourself at ease.

Make Your Own Pension

Living off a steady income stream, not portfolio withdrawals, can boost your confidence about spending. A Towers Watson survey found that retirees relying on pension or rental income are less anxious than those who live off investments. Don’t have a pension and don’t want to be a landlord? You can create regular income by buying an immediate fixed annuity. A 65-year-old man who puts $100,000 into one today, for example, would collect about $500 a month for a lifetime.

Add up your monthly fixed costs, such as a mortgage and health insurance. If that amount exceeds your Social Security and any other guaranteed income, fill that gap with an annuity. (Get quotes at ImmediateAnnuities.com.) Granted, if you’re hesitant to spend money, you may be hesitant to lock up funds in an annuity. If so, annuitize a fraction of your money and add more once you’re more comfortable with the idea.

Bucket Your Money

Should you not want to tie up any money in an annuity, you can get comfortable about spending by dividing your portfolio into accounts for different needs. Browning suggests sorting your savings into three buckets. One provides income for everyday expenses over the next few years, the second is for fun pursuits, and the third is for future needs: day-to-day living, emergencies, and bequests.

Put the first two buckets in secure and liquid investments: money-market accounts, CDs, or high-quality bonds. The bucket for later years can have stock holdings for greater long-term growth.

Once that’s done, you can start collecting income—a paycheck for retirement. Set up a regular transfer from a money-market account that’s in your first bucket—enough to cover, with Social Security, monthly bills and usual expenses. Then relax and enjoy.

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When $1.5 Million Isn’t Enough for Retirement

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MONEY Savings

When $1.5 Million Isn’t Enough for Retirement

Q: I am 76 and have been retired for more than 10 years. I have $1.5 million. Is that enough to last till I am 100? How do I make sure I am on track? – William Ricketts

A: It may be surprising that someone who still has $1.5 million a decade into retirement would need to ask if it’s enough. But it’s a legitimate worry. “Whether $1.5 million is enough depends on your lifestyle and spending,” says Theodore Saade, a senior partner at Signature Estate & Investment Advisors in Los Angeles.

Let’s put that $1.5 million in perspective. Using a traditional 4% annual withdrawal rate (increased each year for inflation), a 66-year-old retiring with that amount could safely start out with an income of $60,000 a year, assuming a 30-year time horizon. If you have $1.5 million at age 76, you can withdraw a bit more—perhaps 6% or 7% year—without risking a major decline in your living standards if markets dip. That works out to an income of $90,000 to $105,000.

Read next: When Good Investments Are Bad for Your Retirement Savings

You may not even need to withdraw that much, since you most likely have Social Security income too. A typical single person earning $75,000 a year who claims at full retirement age might receive a payout of $24,000 a year. For a couple, Social Security could easily provide a combined $30,000 to $40,000 a year. All of which suggests you can probably maintain a six-figure income with little risk of running short in retirement.

Whether that income is really enough, however, depends on your spending needs and your financial goals, which might include helping one or more grandkids pay for college or leaving money to heirs. To see if you’re on track, plug in your expenses into a planning calculator, such as Fidelity’s Retirement Income Planner; and to see how long your money will last, try our retirement calculator here.

These projections assume you are keeping your assets invested in a mix of bonds and stocks. Even at 76, you’re still investing for two or more decades, so you need to keep some money in stocks for growth. “It’s not uncommon to live into your 90s and even to 100, and the number of people who do is growing,” says Saade. If you stash that $1.5 million only in low-yielding but stable investments, such as Treasury bonds and money market funds, you may feel more secure. But over those decades, inflation can severely erode your nest egg.

Looking beyond your portfolio, there’s an even bigger risk to consider: incurring medical bills and, especially, long-term care costs. While more people are living longer and healthier lives, the older you get, the more likely it is that you will have some health issues. About 70% of people turning 65 today will eventually need at least some kind of long-term care, which isn’t generally covered by Medicare.

Read next: What You Can Expect from Medicare on Its 50th Anniversary

So it makes sense to plan ahead by checking out costs for long-term care in your area. These prices vary widely by region, but the average stay in an assisted living facility can run $42,000 year, while nursing home care may cost $77,000 or more. Granted, not everyone will need years of expensive care—the average nursing home stay is less than a year. Even so, it’s better to understand your costs and options, says Saade. Odds are, with the right planning, $1.5 million will be enough to meet most of your goals.

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MONEY 401(k)s

Here’s What to Do If Your 401(k) Stinks

Q: My employer offers a 401(k) plan with a match. But all the funds in the plan have fees greater than 1.5%. That seems expensive. What should I do? – Jayesh Narwaney, Colorado

A: “Costs are one of the top things you should look at in a 401(k) plan,” says Mike Tedone, CPA and partner at Connecticut Wealth Management in Farmington, Conn. If your plan charges, say, an extra 1% in fees, that could reduce your retirement savings by 17% over a couple of decades.

Unfortunately, those fees are something that many workers overlook—and it’s easy to understand why. Plan costs aren’t easy to decipher, even though federal rules went into effect two years ago requiring better disclosure of 401(k) fees and investments. A National Association of Retirement Plan Participants study found that 58% of working Americans don’t realize they are even paying fees on their workplace retirement savings plans. And among those who were aware of costs, one out of four weren’t sure how much they were paying.

Here’s what you should know: Most workers pay two kinds of fees in 401(k)s. One category is the plan administration fees, which cover the paperwork and day-to-day operations. These costs might range from a few dollars to nearly $60 year, though some employers will foot this bill.

The other cost, and the biggest one, is the investment fees, which are paid to the managers of your funds. Investments fees typically aren’t covered by the employer—they are pooled together and deducted from your plan assets. You’ll see it listed in plan documents as the fund’s expense ratio.

How much does the average worker pay for a 401(k) plan? The costs, all-in, vary by plan size, but they generally range from 0.5% of assets for large company plans to 1.5% for smaller plans, says Tedone. Large plans tend to have lower fees than small plans because they can take advantage of economies of scale. So if the funds in your plan have investment fees of 1.5%—and that doesn’t include the administrative costs—your 401(k) expenses are indeed high.

To get a more specific idea of how your fees compare to other plans, you can check out BrightScope, which rates more than 50,000 401(k)s.

Unfortunately, there’s not a lot you can do to improve your 401(k) on your own. You could ask your employer to add lower-cost choices, but that isn’t likely to happen anytime soon.

That doesn’t mean you should give up on your plan, though. If your employer offers matching contributions, you should save at least enough to get the match. “That’s free money, and you don’t want to miss out on that,” says Tedone. Also, if you’re married and your spouse has a better 401(k) plan, be sure to max that out.

Meanwhile, you do have other options. First, check to see if your company offers a self-directed brokerage window, which allows you to choose your own funds. If you’re comfortable selecting your own investments, you can build a mix of lower-cost index funds or ETFs. Or you can simply opt for an inexpensive target-date fund.

If your 401(k) doesn’t offer a brokerage window, consider saving outside your plan in a traditional or Roth IRA, which will give you the freedom to pick the investments. You do face lower contribution limits in IRAs, though—up to $5,500 a year for a traditional or a Roth IRA (those 50 and older can save an additional $1,000) vs. $18,000 in a 401(k). And you must meet certain income limits to qualify for tax breaks.

At the end of day, though, it’s hard to beat your 401(k) for building retirement savings, despite the high costs. The plan allows you to put away the most money on a tax-sheltered basis. What’s more, it’s the easiest way to save, since your contributions are automatically taken out of your paycheck. “When you take all that into account, your plan isn’t as bad as you think,” says Tedone. And at some point, when you change jobs, you’ll be able to move your savings to a better 401(k) or IRA.

Read next: Here’s How Much Cash You Need in Retirement

MONEY Savings

Here’s How Much Cash You Need in Retirement

Q: I am in my eighth year of retirement. A few years in, I found myself spending a considerable amount on repairs and upkeep on my old house. I also had to replace my car. Luckily, I was able to build up a reserve fund to cover costs so I didn’t have to dip into my investments for these “life happens” events. What is your advice on how much cash a retiree should have on hand to feel secure? – Karen Hendershot

A: Of course, everyone should have a cash cushion to handle unexpected expenses, but retirees need a larger cash reserve than people who are still working, says Richard Paul, president of Richard W. Paul and Associates in Novi, Mich. “The stakes are higher for retirees,” Paul says. “When you’re no longer earning an income, the money you have saved isn’t easily replaced.”

If you need to tap your investments for emergencies, you risk spending down your portfolio too quickly. And if you have to sell securities in a down market, you’ll need to take a bigger chunk to get the amount you need.

Relying on your investments for unexpected expenses could also trigger some nasty tax consequences. If you liquidate money from a taxable account, the income could bump you into a higher tax bracket and cost you even more.

So, how much do you need? While the standard recommendation is to have six to 12 months of money set aside to cover emergencies, retirees should have at least 12 to 18 months of cash, says Paul. That should be enough to cover daily expenses as well as any emergencies that might crop up. “This creates a safety valve, so you’re not at the whims of the market,” he says. Use an interactive worksheet like this one from Vanguard to tally up your monthly expenses.

Exactly how much you will need depends on your individual circumstances. If you have guaranteed cash flow, say from a pension and Social Security, that covers your daily expenses, you won’t need to have as much set aside as someone who is already withdrawing money from a portfolio to cover living costs. You can’t foresee emergencies but you can plan for them. If you have an older home, for example, you can anticipate needed repairs or upgrades like a new roof. If you have any medical issues, you’ll want to keep a larger stash for medical costs. “Medicare doesn’t cover everything,” Paul notes.

Since people tend to enter retirement with most of their money tied up in investments, such as 401(k)s and IRAs, Paul recommends that you start building up an emergency fund before you retire. While you’re still earning, start funneling money into a savings account and move a portion of an IRA into a short-term bond fund.

On the flip side, you don’t want to keep too much of your savings in cash. You won’t earn much interest in a money market fund or basic savings account, so balance that cash cushion with investments that can keep up with inflation. “You still need your money to grow,” Paul says.

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