You can’t predict financial emergencies — but you can prepare for them.
To do that, you can build an emergency fund to pay for unexpected expenses, some of which may be sizable. Without one, you might be forced to dip into your investments, possibly including your retirement accounts, such as your IRA or 401(k). If this happens, you might have to pay taxes and penalties, and you’d be withdrawing dollars that could otherwise be growing over time to help pay for your retirement.
In thinking about such a fund, consider these questions: How much should I save? The size of your emergency fund should be based on several factors, including your income, your spouse’s income and your cost of living. However, for most people in their working years, three to six months of total expenses is adequate. Once you’re retired, though, you may want to keep up to a year’s worth of expenses in your emergency fund — because you don’t want to be forced to cash out investments when their price may be down, and you may not be replenishing these accounts any longer.
