Retirement planning: Financial professionals recommend maintaining an emergency cash fund covering one to three years of basic needs
A hefty financial buffer, equivalent to one to three years of essential expenditure, is considered optimal for individuals after they retire, according to finance experts.
This suggestion surpasses the conventional advice of accumulating an emergency fund of three to six months’ wages for the employed, as bouncing back from financial setbacks is more manageable while there is still an income.
Hargreaves Lansdown’s Personal Finance Chief, Sarah Coles, advises that the decision on the amount to put aside for urgent needs ultimately depends on what one deems critical and the sum allocated to such necessities.
The company’s research shows that minimum wage earners spend an average of £748 per month to cover essential bills, while median wage earners spend about £1,685.
Hargreaves Lansdown suggests that people aged 60 and over should aim to keep an emergency fund ranging from £16,680 to £50,040.
‘Your position in this range depends mainly on your situation,’ says Coles.
‘If you receive a substantial, secured income from a defined benefit pension scheme, you might have extra room to save during retirement and handle some emergency expenses from your monthly pension.’
‘If your income is less, it would be best to save more tender.’
Essentials for Tax-Free Cash Withdrawal
In most cases, your emergency cash fund will comprise pre-retirement savings and parts of your tax-free pension lump sum, says Sarah Coles of Hargreaves.
However, she reminds individuals that claiming a tax-free lump sum should not be done lightly.
‘Claiming your tax-free lump sum implies forfeiting any potential growth associated with your investments, and in many cases, it could mean leaving a tax-efficient environment,’ she warns.
