Elizabeth O'Brien for the Wall St Journal writes: Add one more item to the bucket list—this time at the urging of some financial advisers. The latest research underscores the importance of putting retirement assets in the right places. One strategy: an "emergency bucket" to cover unexpected expenses, especially medical costs.
Fidelity Investments estimated that a 65-year-old couple retiring in 2012 would need $240,000 in savings to pay for out-of-pocket health-care costs. That estimate excludes long-term care, which can cause overall costs to surge even further: The median annual cost of private-room nursing-home care in the U.S. is $83,950, up 13% from 2009, according to Genworth's GNW +0.70% 2013 Cost of Care Survey. And if an emergency creates a need for help at home, then "it's scary how big the numbers can get," said Lisa Chapman, wealth adviser in Long Beach, Calif. at UBSUBSN.VX +6.81% Wealth Management Americas. Round-the-clock skilled nursing care in the home can run as much as $10,000 a week.
When tapping savings to pay medical bills, advisers say, top priorities should be avoiding a bigger tax bite and not selling off a stock portfolio in a down market.
Many advisers now recommend an emergency bucket that serves these goals. Thomas and Rob Fross, brothers and partners in Fross & Fross Wealth Management in The Villages, Fla., put about $50,000 of clients' money into short-term bond funds for emergency expenses. The motive is asset stability: The Frosses don't want market fluctuations in funds client might have to tap on short notice.
It is often best for tax purposes if that bucket is separate from a retiree's traditional retirement account—even more so because rates have gone up this year for some affluent retirees. Many retirees have a 401(k) or IRA drawn-down strategy that covers regular expenses, such as mortgage payments, and a bigger-than-expected withdrawal could bump them into a higher tax bracket, Ms. Chapman said.
When faced with unexpected expenses, Ms. Chapman advises clients to dip first into the assets with the lowest rates of return, such as certificates of deposit or savings accounts. In some cases, this may mean losing a bit of principal if investors haven't incurred enough interest to cover a CD's early-withdrawal penalty, notes Greg McBride, senior financial analyst at Bankrate.com.
Also worth remembering: The settlement time for many brokerage-account transactions is three business days. Truly immediate needs—say, to pay for treatment while traveling abroad—should be met from money market, checking or savings accounts, or, in a pinch, with a credit card.
Finally, the Fross brothers said, it's imperative that retirees assign power of attorney to a trusted person who can access their assets if they're unable to do so. Even spouses can't access one another's accounts without that legal document (unless the accounts are listed in both names.)
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