Retirees can face unexpected expenses of up to $7,000 a year. Here’s how to prepare your safety net now

Retirees can face unexpected expenses of up to $7,000 a year. Here’s how to prepare your safety net now

Will Kenton

Mon, February 9, 2026 at 7:30 AM EST

6 min read

A common mistake when saving for retirement is to focus all your mental energy on one number: your nest egg.

But while a large 401(k) and IRA balance is essential, it is not a complete plan.

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Without a reserve of cash for emergencies, unexpected expenses can derail your nest egg withdrawal strategy, forcing you to sell assets during market downturns or even trigger unnecessary tax bills.

Real retirement readiness requires a dedicated cash buffer to handle emergencies that are entirely predictable in category, even if their timing remains a mystery.

Here is how to build a safety net that protects your lifestyle and your longevity.

The real magic number you need to work towards

According to an analysis by the Center for Retirement Research at Boston College, retirement is rarely a smooth financial ride (1).

Their study found that 83% of retired households experience at least one unexpected expense in any given year.

For the typical household, these spending shocks amount to about 10% of their annual income.

The study identified three primary buckets where these costs cluster:

Rainy-day household needs: Repairs and maintenance averaging about $3,300.
Family-related expenses: Helping children or relatives, averaging about $5,700.
Healthcare: Out-of-pocket medical needs averaging about $4,100.

While these costs are common, many retirees are unprepared.

The study reports that only 58% of older households have enough cash to cover one year of predicted shocks.

Another 16% could manage by tapping retirement accounts, but a concerning 27% fall short even after exhausting both cash and retirement assets.

Read More: The average net worth of Americans is a surprising $620,654. But it almost means nothing. Here’s the number that counts (and how to make it skyrocket)

Emergency savings math changes once you retire

During your working years, many emergency expenses are exacerbated by job loss. In retirement, that risk disappears, but the stakes of an emergency actually rise.

In retirement you can no longer "earn your way out" of a surprise bill.

When you are no longer receiving a paycheck, you have a limited ability to replenish savings through work, which makes the size of your initial reserves an existential factor in retirement planning.

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Tapping retirement accounts to cover a furnace repair or a medical deductible creates tax and timing headaches.

If you are under age 59½, taking an early distribution from a traditional IRA or 401(k) can trigger a 10% penalty from the IRS, on top of standard income taxes.

Even for those older than 59½, a large, unplanned withdrawal can push you into a higher tax bracket or increase your Medicare premiums, making that "emergency" significantly more expensive than the sticker price.

How big should your emergency fund in retirement be?

Finding the Goldilocks zone for your emergency fund is key to long-term success.

Based on the Boston College findings, a baseline target should be at least 10% of your annual income held in liquid savings specifically for spending shocks.

According to the AARP, many financial advisors suggest a more robust cushion of 18 to 24 months of essential expenses. This larger buffer provides peace of mind during extended market volatility, allowing you to leave your invested portfolio untouched while the market recovers (2).

Additionally, your individual circumstances play a role here too: “Retirees with steady income and liquid portfolios may need less cash, while those with higher medical risk or less flexibility need more,” says certified financial planner Joon Um (3). “The goal isn’t to maximize cash. It’s to have enough on hand to avoid selling long-term investments at the wrong time.”

There is, however, such a thing as too much cash.

Holding excessive amounts of liquid cash can allow inflation to quietly erode your purchasing power. The AARP recommends capping this fund at 24 months of expenses so that the rest of your wealth can remain invested and growing.

Keep your emergency money safe, accessible and working

Your emergency reserves should prioritize liquidity first and yield second.

High-yield savings accounts (HYSA) or money market accounts are the primary place to store liquid cash. They offer instant access and since 2022 they have offered better interest rates than standard checking or savings accounts.

Many money market accounts also offer higher interest rates and accessible cash. These accounts invest in short-term securities like Treasury bills (T-bills).

You can also buy T-bills directly from the Treasury through its TreasuryDirect website. These securities are issued for terms ranging from 4 to 52 weeks.

It is worth noting, however, that this process takes some work and you can get the same benefit by holding a money market account or an ETF that invests in T-bills.

The CFPB emphasizes that keeping these funds in a dedicated account, separate from your everyday spending, creates a psychological boundary that protects the money for its intended purpose (4).

How to build your safety net in 3 easy steps

If you want to secure your retirement today, follow this three-step framework:

First, define your "essential" number to calculate your monthly baseline for housing, utilities, food, insurance and medical costs. Multiply this by 18 or 24 to find your target range.

You can use the 10% of income benchmark from the BC study as a secondary check to ensure you are covered for non-essential shocks like helping family members.

Second, create a multi-bucket structure to keep from putting all your cash in one place.

Set up small instant access buckets for savings, a larger liquid bucket in a high-yield savings account or money market account and a top layer bucket with T-bill ETFs or short-term CDs to prevent you from being forced to sell long-term investments at the wrong time.

Step three, automate your savings. If you are still working, take advantage of SECURE 2.0 provisions like Pension-Linked Emergency Savings Accounts (PLESAs), which allow for dedicated emergency caching within a retirement plan.

If you are already retired, schedule a small transfer from your income source to your emergency fund until it is topped off.

Combine the bucket method with preventionary measures like annual home maintenance and Medicare cost-sharing reviews to ensure that when a shock does arrive, it’s a minor inconvenience rather than a financial disaster.

Retirees can face unexpected expenses of up to $7,000 a year. Here’s how to prepare your safety net now