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Do you count your emergency funds in your retirement calcs?
Old 03-25-2011, 07:35 PM   #1
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Do you count your emergency funds in your retirement calcs?

I'm still in accumulation stage and as is appropriate, we have approx 12 mo of salary set aside in liquid assets for emergency funds. Now, I'm wondering, when we move to decumulation, do we count the emergency funds in the calcs. 3.5% may be a stretch if I just look at the "portfolio", not so much if I can include the emergency funds.

Seems appropriate to include it, since we're not worried about losing jobs anymore after we declare FIRE.
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Old 03-25-2011, 08:04 PM   #2
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It seems to me to be a bad idea to include "emergency funds" in any calculation relating to withdrawals. Emergency funds are for emergencies, right?

Your retirement is not an emergency (or let's pray it's not!)
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Old 03-25-2011, 09:12 PM   #3
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It shouldn't really matter what you do. If it does, then something is probably wrong.

Let's say you have a million dollars and an additional $40K in an emergency fund.

If you do not include the emergency fund, the 4% rule-of-thumb says you can withdraw & spend $40K the first year of retirement.

If you do include the emergency fund, the 4% rule-of-thumb says you can withdraw & spend $41.6K.

If that $1600 difference is going to make-or-break your retirement, then something is not quite right.

Another way to look at this is that $40K is 3.85% of $1.04Million. If your retirement depends on a 0.15% to 0.20% change in withdrawal rate, I would wonder about that.
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Old 03-25-2011, 09:28 PM   #4
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Once retired, most folks have some portion of their retirement funds allocated to cash. Carving out part of your cash allocation as an emergency fund seems to me to be unnecessary.
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Old 03-25-2011, 09:42 PM   #5
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Once retired, most folks have some portion of their retirement funds allocated to cash. Carving out part of your cash allocation as an emergency fund seems to me to be unnecessary.
Yeppers.

We handle our finances by using a WR of 3%. If an emergency comes up (like it did for us this year) we will withdraw additional money. Hopefully an extra 1% will take care of the 'oh shizzes' and not break the bank.
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Old 03-25-2011, 09:44 PM   #6
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Yes, as previous posters have said, cash is cash, whether it is part of AA or emergency funds.

The confusion might be because for people just starting out, the 12-month living expense in cash may be a big portion of their net worth.

In retirement, it would be just part of the cash portion of the AA, which can be a lot higher than 12-month living expenses, depending on one's AA preference.

PS. By cash, I mean liquid assets that one can get to if necessary in a few days, such as checking accounts, money market funds, CDs, I-bonds, etc...
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Old 03-25-2011, 10:18 PM   #7
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Be careful about inflating the value of what you can withdraw from and your calculations based on that while you are still in the accumulation phase. You might not want to be "decumulating" from your emergency fund while not yet retired.
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Old 03-26-2011, 06:20 AM   #8
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Thanks for the replies. I have one of those jobs that can take a long time to find if something would happen. Plus, we're both pretty conservative, so our emergency fund is nearly 2X my annual gross salary and probably 3X our actual expenditures. It's nearly 20% of the value of our investments. So, including it increases the portfolio by 20%. I think I'll redo some calcs assuming 75% of it as part of the portfolio and see how the numbers look. This would leave approximately 6 mos of expenses in the emergency fund.
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Old 03-26-2011, 06:32 AM   #9
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I think I'll redo some calcs assuming 75% of it as part of the portfolio and see how the numbers look. This would leave approximately 6 mos of expenses in the emergency fund.
I think this is very reasonable.
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Old 03-26-2011, 06:42 AM   #10
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Once retired, most folks have some portion of their retirement funds allocated to cash. Carving out part of your cash allocation as an emergency fund seems to me to be unnecessary.
+1. I include all my cash too, it all supports my expenses so why segregate it. The only assets I exclude are personal property that I can't do without (home & cars) as they can't really be converted to income.
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Old 03-26-2011, 06:45 AM   #11
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I would consider what kind of emergencies I am trying to guard against and fund accordingly. I'm not worried about losing my j*b in retirement so don't need to figure that in. But there may be other emergencies unique to my retirement. On the cash is cash point, it is, but I may want to also think of the tax implications of withdrawing a big chunk of cash to replace a furnace etc. and keep that cash outside of my retirement accounts.
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Old 03-26-2011, 07:36 AM   #12
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+1 on cash and cash equivalents. They are part of our retirement portfolio and the whole bunch could be considered an "emergency" fund in that it is available to be drawn on if unusual expenses come up or if the market turns down.
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Old 03-26-2011, 10:02 AM   #13
 
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I don't count emergency or special purchase (car, etc.) funds as part of my AA. That money is invested in safe vehicles i.e. savings accounts & CDs. not to make large (or lose) money in the market.
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Old 03-26-2011, 01:51 PM   #14
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I don't count emergency or special purchase (car, etc.) funds as part of my AA. That money is invested in safe vehicles i.e. savings accounts & CDs. not to make large (or lose) money in the market.
I keep unused funds from my annual withdrawals in my regular portfolio but I track the amount and do not use it in future withdrawal calculations. I view this as a fund for whatever I want it for. I suppose it could be called an emergency fund and would certainly be tapped as such if things got bad enough. Of course, since it resides as part of my overall portfolio it would decline proportionally in a crash (and grows proportionally in a bull market).
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Old 03-26-2011, 02:00 PM   #15
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I always thought that an "emergency fund" was to ensure that you could cover expenses if you lost your job. Once retired, this is not a consideration. Other emergencies for a retiree might be replacing the A/C in the home or cover a large repair to automobiles etc.
Your every day expenses should always be covered once retired. Your cash should be where you can get to it at all times for expenses or emergencies. Just my $.02.
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