Many retirement planners routinely suggest that retirees keep an amount equal to six to 12 months of living expenses in cash equivalents, like money market accounts, as an emergency fund.
One reason for this recommendation is to mitigate the risk that assets will have to be liquidated at unfavorable prices in a down market, should an unexpected financial need arise.
(Related: Life Settlements and Long-Term Care)
For retirees, financial setbacks, especially those due to health-related problems, are always a real and present danger. The combination of a critical financial need and a down market is a real possibility, especially in today’s economic environment. Recently, for example, the stock market has fluctuated wildly, and looking out into the not too distant future, many prognosticators are predicting a recession. Similarly, other investment markets like bonds and real estate can also be depressed at any moment in time.
A down market and a critical cash need could require liquidating part of a retirement nest egg at a most inopportune time. Effectively, this would lock in down market losses and can cause permanent harm to a retiree’s financial security.