Emergency Fund vs. IRA: Which Should You Tap First in Retirement?

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Have access to both savings and investments as a retiree? Here’s your game plan for deciding which funds to access at different times. 

The average 60-something today has $112,500 in retirement savings, according to Northwestern Mutual. But ideally, you’ll end up starting off your retirement with a higher IRA balance than that. In fact, ideally, you’ll have not just an IRA at your disposal, but also, an emergency fund.

Workers are often advised to sock away three months’ worth of essential living expenses in a savings account in case unplanned bills arise. That three-month recommendation also stems from being able to cover a period of unemployment in the event of unexpected job loss.

If you’re retired, it means you don’t have a paycheck from a job you need to worry about replacing. But you might still encounter your fair share of surprise bills, like home and car repairs. So it’s a good idea to have an emergency fund to tap on top of an IRA.

It does raise the question, though — which account should you withdraw from first once your career wraps up?

Your IRA is usually your best bet for everyday expenses

Once you stop working, you’ll likely still need access to money to pay your bills. That’s what your IRA is for.

Your IRA is an account you should expect to tap regularly in retirement. Your emergency fund, by contrast, is an account you should generally reserve for unplanned bills.

The reason is that in an emergency, you might need access to actual cash in a pinch. You can get that from your bank. With an IRA, you have to go through the process of selling investments first, and you may not get access to your money as quickly.

Your emergency fund can step in when the stock market tanks

While it’s generally best to tap your IRA for everyday expenses, there’s an exception to that rule, and it’s during periods when the stock market is going through a major slump. While your emergency fund is supposed to sit in cash, your IRA is supposed to stay invested in stocks and other assets that can help your balance continue to grow during retirement.

But let’s say the stock market takes a dive and the assets in your IRA lose value. If you were to take an IRA withdrawal, you’d be locking in a loss by liquidating an asset to free up that money. So in that specific situation, it’s usually best to tap your emergency fund first, especially if it’s pretty robust.

In fact, for people who are still working, the general convention is to save enough money in an emergency fund to cover three months of bills. But retirees are often advised to keep at least a year’s worth of expenses in the bank. That way, if the stock market experiences an extended period of decline, you can avoid locking in losses by tapping your savings instead of your investments.

All told, entering retirement with a nice-sized IRA and emergency fund gives you the best of both worlds. But it is important to know which account to tap first under different circumstances.

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