During your working years, it’s generally recommended to have an emergency fund that can cover three to six months of living expenses. But in retirement, that cushion might need to be even larger to handle unexpected costs—including the impact of a stock market dip on your Thrift Savings Plan (TSP).
When Markets Decline, Your TSP May Be at Risk
In a bear market, taking withdrawals from your TSP can deplete your retirement savings more quickly, especially since taxes apply to withdrawals from a traditional TSP. By using an emergency fund to cover living costs during a market downturn, you can avoid dipping into your TSP while waiting for the market to recover. Some financial experts suggest building an emergency fund that can cover 18 to 24 months of expenses to offset potential market volatility.
An Emergency Fund Helps Cover Delays in Pension Payments
It can take several months for the Office of Personnel Management (OPM) to finalize your retirement application. During this time, you may experience a gap in income. Without an emergency fund, you might have to tap into your TSP for temporary expenses. Having a cash reserve can help bridge this gap until interim pension payments begin, typically about three months into retirement.
Your TSP Is for Long-Term Income—Not Emergencies
Your TSP, along with your FERS pension and Social Security, is designed to support you throughout retirement. Using it for emergencies can jeopardize your long-term financial security. By having an emergency fund, you can cover unexpected expenses and let your TSP balance grow as planned.
Options for Setting Up an Emergency Fund
In addition to a traditional savings account, consider these options for your emergency fund:
- High-Yield Savings Account: These accounts, often offered by online banks, provide higher interest rates. You can easily transfer funds to a checking account for access when needed.
- Money Market Account: Money market accounts may offer a higher yield than traditional savings and often come with a debit card or checks for quick access in an emergency.
- Roth IRA: Contributions (not earnings) to a Roth IRA can be withdrawn anytime without taxes or penalties, making it a flexible option for emergency savings.
To discuss ways to safeguard your retirement income, consider reaching out to an FRC® trained advisor.
