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Emergency Fund
Old 03-12-2013, 03:32 PM   #1
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Emergency Fund

Are high dollar emergency funds necessary if you have secure employment and a substantial 401k?

We have 3 months of expenses in cash - secure professional employment (for one - wife stays home with 2 kids) - and 2.5x gross salary in 401k - age 36.

I know that traditional wisdom suggests 6-12 months expenses but I hate to pull back on retirement savings to pad the emergency fund.

I know that I would have penalties if I accessed 401k funds early but the possibility is very remote.
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Old 03-12-2013, 03:34 PM   #2
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"the possibility is very remote".

Sh!t happens. Do you have disability insurance? Life insurance? A HELOC?
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Old 03-12-2013, 03:57 PM   #3
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A Roth IRA can serve as an emergency fund, since your contributions (not the growth) can be withdrawn any time without penalty. Obviously, if these funds are in volatile equities then you might take a hit if you withdraw depreciated shares, so it might make sense to keep the "emergency funds" in ST bonds or cash equivalents.

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Originally Posted by mark3rs View Post
I know that traditional wisdom suggests 6-12 months expenses but I hate to pull back on retirement savings to pad the emergency fund.
Money you keep in "regular" after-tax accounts is still part of your retirement savings. Most folks who want to retire early will probably need to save more than can "fit" in government-sanctioned "retirement" accounts.
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Old 03-12-2013, 03:59 PM   #4
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it certainly does happen...

17.5x gross salary in life insurance and about 80% income replacement for LTD.

No HELOC - currently not enough equity

Not eligible for a ROTH but certainly will need to save more for retirement than 401k max and will likely start in the next couple of years.

My employer currently contributes (not match) $22,000 (15% of gross salary) to my 401k plus my personal $17,500.

I could scale back my personal contributions and put it in cash but then I lose the tax deduction and the growth (assuming cash or cash equivalent).
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Old 03-12-2013, 04:06 PM   #5
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Sh!t happens.
Usually when you least expect it - and don't think it will.

One of the bumpiest rides of my financial life was a two-month stretch without employment, a stay at home wife and two small children - and a three month emergency fund. Wasn't pretty and I swore I would never be caught like that again.

I think six months is the bare minimum, a year is much better.
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Old 03-12-2013, 06:39 PM   #6
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We have 3 months of expenses in cash
With 3 other people depending on my pay check, I would probably have a comfort zone 12 months cash in the current stinko job market. As always, your call.
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Old 03-12-2013, 06:40 PM   #7
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A very large part of my assets is in cash (see my signature line) so technically I have about 47 years (up to 95 years of age) in cash. My employment is secure.
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Are high dollar emergency funds necessary if you have secure employment and a substantial 401k?
.
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Old 03-12-2013, 06:54 PM   #8
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Sounds to me like you're looking for someone to give you permission to not do what you know is right.

There's no such thing as secure employment. That's what the contingency fund is for - those events you can't predict that would otherwise wipe you and your family out financially. If you're comfortable gambling with their security, go for it. It's a free country.
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Old 03-12-2013, 07:08 PM   #9
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Quote:
Originally Posted by mark3rs View Post
Are high dollar emergency funds necessary if you have secure employment and a substantial 401k?

We have 3 months of expenses in cash - secure professional employment (for one - wife stays home with 2 kids) - and 2.5x gross salary in 401k - age 36.

I know that traditional wisdom suggests 6-12 months expenses but I hate to pull back on retirement savings to pad the emergency fund.

I know that I would have penalties if I accessed 401k funds early but the possibility is very remote.
If I were in your shoes, 6 months would feel about right. You are in much better shape and protected than most your age. YMMV
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Old 03-12-2013, 08:46 PM   #10
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Quote:
Originally Posted by mark3rs View Post
Are high dollar emergency funds necessary if you have secure employment and a substantial 401k?

We have 3 months of expenses in cash - secure professional employment (for one - wife stays home with 2 kids) - and 2.5x gross salary in 401k - age 36.

I know that traditional wisdom suggests 6-12 months expenses but I hate to pull back on retirement savings to pad the emergency fund.

I know that I would have penalties if I accessed 401k funds early but the possibility is very remote.
Think of it this way. If you got laid off tomorrow, how long would it take you to find another job? How much would you need for living expenses during that time? Then double it.
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Old 03-12-2013, 09:07 PM   #11
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I think you see how most of the posters on this forum think about this issue. The money in your 401 could be used in an emergency but a larger emergency fund would be a better choice. I believe in moderation in financial matters. I would cut back a little on the 401K contributions to slowly grow the emergency fund.
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Old 03-12-2013, 09:58 PM   #12
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I certainly do not want to put family at risk.

In the event of job loss, I have two IRAs with a total of $90,000 - which is about 7 mos expenses (with no cut in lifestyle) after taxes and 10% penalty - this would be tapped only after 3 mos cash is running out. The IRAs are not part of my retirement planning assets (have 401k that appears on track for ER at 59.5) and are mentally reserved for emergency or more hopefully part of college fund. Could back door ROTH with them but would have to wait five years to access anyway - by then I hope this concern is moot.

Cutting back on 401k contributions is an option but again - lose the tax deduction in 28% bracket and lost gains.

Trying to find the balance. Hope to grow the emergency fund in next two years to a fully funded 8 months or so with bonus income. Major expenses are generally paid for in cash out of annual bonus - but nothing is guaranteed.
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Old 03-12-2013, 10:06 PM   #13
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Can you do a backdoor Roth or are other IRA's in the way?

Otherwise, the riskiest thing I'd do is invest the emergency fund as part of your AA in a taxable account. You still might have to sell for cash in a recession if you lost your job, hence the risk. Once you build a sizeable taxable account so that raising 12 months of cash doesn't look so bad then I wouldn't even worry about an emergency account.
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Old 03-12-2013, 11:33 PM   #14
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Originally Posted by mark3rs View Post
I know that traditional wisdom suggests 6-12 months expenses but I hate to pull back on retirement savings to pad the emergency fund.
As has been mentioned, the 6-12 months expenses (not salary) is usually intended to get you through periods of lost employment (i.e. think of it as supplemental unemployment self-insurance), so as others have mentioned, one factor in guessing how much you will need is how long it will take you to find another position.

We also began with 3 months expenses kept in laddered 3 mo. CDs, and built it up over time to 12 months -- kept in laddered 12 mo. CDs. YMMV.

Our suggestion would be to review your budget and see if there are some expenses that can be cut to gradually add to your emergency fund. Also, if you have any taxable investments, now might not be a bad time to do some profit-taking, or change distribution options to "cash" to build up a few extra months worth of expenses.

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Old 03-12-2013, 11:51 PM   #15
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I do not have an emergency fund per se.... I just have a good amount of investments that are in taxable accounts, but I have them invested in stock mutual funds except for a small amount...


If I NEED the money, I am willing to take the hit if it is a down market... because I think that I have made a lot more keeping it invested over the years... as always, YMMV...
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Old 03-13-2013, 04:12 AM   #16
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Many folks have a tiered set of funds for emergencies. Let's face it: You don't need cash for 6 months of expenses instantly on Thursday afternoon. For example, even if you totaled your car and needed to buy a new one, you could rent a car or get a loan.

So an emergency fund could consist of what's in your checking, savings, credit cards, joint brokerage account, Roth IRA, etc. I am not sure I would use an account that had a penalty for withdrawing such as a 401(k) or traditional IRA though. The actual assets could be cash, CDs, short-term bond funds, bonb funds, and even stocks. Yes, even stocks.

But if you are using bond funds that might drop 10% in value, you will want your emergency fund to be 10% larger than someone who is 100% cash. If you are using stocks, you might want your emergency fund to be 2X or 3X as large as someone using cash.

Once you are financially independent or retired, the idea of a emergency fund is kinda moot. Your entire portfolio is an emergency fund in that case.

You don't need permission from folks on the internet to do what you want.

And here's an interesting technique that some folks use, Wiki article link: Placing Cash Needs in a Tax-Advantaged Account
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