How to Save Your Retirement Savings from Disaster

When GOBankingRates conducted its 2017 retirement savings survey, some of the results were pretty scary. 29% of the respondents aged 55 and up reported that they had no money saved for retirement, while another 15% from this age bracket said they had less than $10,000 saved. Why would someone so close to retirement have so little money saved? Nearly 50% of these respondents said they had no retirement savings because they'd spent the money on a financial emergency.

Saving for retirement isn't enough

Regularly saving money for retirement is a good start, but it's not enough to guarantee you'll still have those funds when you're ready to retire. There will inevitably be "life happens" moments along the way, and if the only money you have saved up is your retirement savings, you may have no choice but to use that money in a crisis. The alternative -- to run up a pile of credit card debt every time you're faced with a financial emergency -- is arguably even worse.

How to protect your retirement savings

The solution to this dilemma is simple: Just as you have an account dedicated to saving for retirement, you should set up another account dedicated to covering emergencies. Yes, this means you'll have to make room in your budget for even more saving. The good news, however, is that you don't need nearly as much in your emergency savings account as you do in your retirement savings account. And once you hit that minimum level, you can quit funding your emergency savings account (until you have to tap it to finance an emergency, that is).

Deciding how much you need

There's no magic formula that can tell you exactly how much to save for emergencies, because the answer will vary depending on your lifestyle and your needs. A single 20-something with a steady job and no children doesn't need more than about three months' worth of expenses saved up for emergencies. Someone with dependents and a less reliable source of income should save more -- say, six months' worth of expenses. A person with dependents, poor job security, and no familial support network would be wise to save at least a year's worth of expenses if possible.

Another factor to consider is your comfort with risk. Would you feel safe with three months' worth of expenses saved, or would you fret constantly that it might not be enough? In the latter case, keep saving until you hit your own comfort level. You may never use all those funds, but they will at least buy you some peace of mind.

Put your emergency savings to work

In the current economic environment, the idea of having a lot of money sitting in a savings account makes many people cringe. After all, stocks are producing remarkable returns, while savings accounts at big banks often pay no more than a fraction of a percent in interest. Fortunately, there are a few options that will pay more than the standard bank savings account while still keeping your money both safe and easily available. As of this writing, Bankrate reports that internet banks are offering as much as 1.3% interest on their savings accounts. And the Treasury Department's MyRA allows you to save up to $15,000 in a special Treasury fund that currently promises an annual return of 2.25%. Note that a myRA is technically a Roth IRA, so you may face tax penalties if you remove your contributions within five years -- thus it's best to have this account in addition to, rather than instead of, a standard emergency savings account.

When should you use the money?

Of course, when you've worked so hard to fund that emergency savings account, you don't want to spend the money frivolously -- but you don't want to leave it sitting there when you should really be using it, either. Emergency savings are intended to pay for unexpected, necessary expenses. Paying for repairs after your car breaks down would be a great use of these funds; paying your annual car insurance premiums would not. The first is something you couldn't predict but definitely need to pay for, while the second is a basic expense you knew was coming.

If you have trouble budgeting for predictable but large expenses, consider setting up yet another savings account just for these kinds of purchases. It may seem silly to have such a multitude of savings accounts, but if it gives you the ability to keep up with big expenses, pay for crises, and eventually retire with a comfortable income, isn't it worth the hassle?

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