Emergency fund in retirement

[tuixiu]

Hi!

We're still in accumulation phase (but seeing the light at the end of tunnel) was curious whether you retired types maintain an emergency fund. In your working years one constantly hears the 3-6 months of living expenses thing but clearly is mainly for loss of income due to job loss, with a nod to major expenses popping up like medical, home repair, car repair etc.

Right now we keep about 15k in a MM fund as our emergency stash, but as we approach retirement it seems less and less useful. Actually it might not even be needed now since we can live on either one of our incomes and have plenty in taxable retirement savings. So what do you guys do when you hit the point where you are living on accumulated assets as opposed to a paycheck? Do you even bother with an emergency fund or just figure if have major expense just sell some of those assets (granted possibly at a loss) to handle it?

Thanks for the wisdom, as always

 

[pb4uski]

I think of mine less of an emergency fund and more as liquidity to avoid needing to sell investments at an inopportune time. The main change that I have made in ER is to make 6% of my 40% fixed income allocation cash and short term investments. This 6% is 18-24 months of living expenses.

I guess in retrospect, I didn't have much of an emergency fund when i was working since i had a steady paycheck.

 

[steelyman]

I bother with an emergency fund in case of, well, an emergency.

Ir's split between a money market, stable value, and bond fund.

 

[Meadbh]

There are two potential sources of emergency funds for me:
1. I could pay myself a corporate dividend from a HISA which currently has over 1 year's worth if expenses in it. This would generate a tax liability next year.
2. I could use my HELOC at prime + 0.5%.

 

[scrabbler1]

Similar to pb4uski, I, an early retiree, keep something resembling an emergency fund in tiers, using ease, speed of access and liquidity, and relative security of principal as criteria. This is no different from when I was working.

For example, tiuxiu, I keep a small cushion of cash (about $750) in my local bank's checking account beyond minimum balances needed to avoid monthly fees to cover any small and unforeseen expenses which may arise. I tap into that cushion often for $100 here and there, replacing it in a month or two. My next tier of funds is a larger (about $40k) amount I keep in an intermediate-term muni bond fund which is part of my overall portfolio. It earns interest (about 2.5%, not a lot but mostly tax-free which is nice) and is nearly as accessible as the local bank account. I have checkwriting privileges in this fund so I can write a check if I need it. I can do an electronic transfer to my local bank's checking account and I will be able to use for everyday purposes in about 2 days. I have rarely had to tap into this account to cover any large, unforeseen expenses the local bank's checking account could not handle, the last time back in 2010. But it is always there in case I need it and it is earning interest, unlike the local bank's checking account.

 

[Alan]

ER here, and no emergency fund as such, but I do have a large chunk of IBonds that serve as a sizable buffer should things go pear shaped. I would draw this down before selling equities if an unexpected large amount of cash was needed.

 

[Katsmeow]

I keep an extra few thousand dollars in the savings account at the bank so that if there is an unexpected expense that I can't put on a credit card I can do so without having to wait to transfer money from Vanguard (I know you can get check writing with Vanguard but I haven't done that).

In addition, DH keeps a 15k IRA account at the bank. This is basically just parked there as another source of cash that we can quickly access if need be. I do count this when considering our AA.

 

[tuixiu]

Thanks all, it always good to hear replies from the gang here.

IRA is an interesting thought too, we each have a Roth that combined easily has more than 100k of contributions that we could raid without penalty if we needed to.

I'll probably lighten up the 15k in the MM fund.

Thanks again.

 

[imoldernu]

Question about how you handle withdrawals from the MM or IRA funds. Ours in Maryland, and withdrawal from the IRA, requires a signature, not just a fax. Three days mail in transit, 2 days for weekend, and three to five days to receive check, makes the transaction a bit lengthy, especially in case of an actual emergency.
With a tie in transfer to the local bank, (which has to be done in advance by about a week, the first time,) the actual time to receive cash, is down to 4 days... (where bank holds the funds for a day or two)... still a long time.

Have never used credit card to "borrow" cash, and almost fell over when I heard the cost to do this... Worse than "payday" loans.

As long as interest rates are so low, we just keep a buffer in our local checking account. Am a dinosaur as far as money tranactions go... so realize there are better ways, but what are they?

 

[Alan]

Question about how you handle withdrawals from the MM or IRA funds. Ours in Maryland, and withdrawal from the IRA, requires a signature, not just a fax. Three days mail in transit, 2 days for weekend, and three to five days to receive check, makes the transaction a bit lengthy, especially in case of an actual emergency.
With a tie in transfer to the local bank, (which has to be done in advance by about a week, the first time,) the actual time to receive cash, is down to 4 days... (where bank holds the funds for a day or two)... still a long time.

Have never used credit card to "borrow" cash, and almost fell over when I heard the cost to do this... Worse than "payday" loans.

As long as interest rates are so low, we just keep a buffer in our local checking account. Am a dinosaur as far as money tranactions go... so realize there are better ways, but what are they?

I've not done any IRA withdrawals yet, but I would expect that it is a few clicks of the mouse just like other withdrawals from after-tax funds and for tIRA to ROTH conversions. Certainly IRA contributions have always been very easy between my bank account and the IRA. (once set up, the bank details are associated with the IRA fund(s) until such time as I change them)

 

[imoldernu]

For IRA 70 1/2 mandatory withdrawals, my bank requires a form...
Here's a form from another bank, and it looks exactly like the one we have to use.

https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA266.pdf

 

[Meadbh]

Question about how you handle withdrawals from the MM or IRA funds. Ours in Maryland, and withdrawal from the IRA, requires a signature, not just a fax. Three days mail in transit, 2 days for weekend, and three to five days to receive check, makes the transaction a bit lengthy, especially in case of an actual emergency.
With a tie in transfer to the local bank, (which has to be done in advance by about a week, the first time,) the actual time to receive cash, is down to 4 days... (where bank holds the funds for a day or two)... still a long time.

Have never used credit card to "borrow" cash, and almost fell over when I heard the cost to do this... Worse than "payday" loans.

As long as interest rates are so low, we just keep a buffer in our local checking account. Am a dinosaur as far as money tranactions go... so realize there are better ways, but what are they?

I am amazed that the process could be this cumbersome. Surely your financial institutions must be able to transfer finds electronically to your local bank? If not, this is an argument for consolidating assets at one or two comprehensive institutions with access from anywhere.

 

[Alan]

For IRA 70 1/2 mandatory withdrawals, my bank requires a form...
Here's a form from another bank, and it looks exactly like the one we have to use.

https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA266.pdf

Suppose you have taken out your mandatory withdrawal then later in the year you find you need to withdraw more, do you still have more forms to complete?

How about ROTH IRA's, no mandatory withdrawals there, do you have forms to fill out each time you want to make a withdrawal?

 

[Alan]

I am amazed that the process could be this cumbersome. Surely your financial institutions must be able to transfer finds electronically to your local bank? If not, this is an argument for consolidating assets at one or two comprehensive institutions with access from anywhere.

An alternative may be for him to place his emergency money in IBonds rather than a MM or savings account. Access is a few clicks of effort, money in the bank next day, savings keep pace with inflation and no tax on accumulated interest until money is withdrawn.

 

[imoldernu]

I have IBonds, but they're earning 5+%, and that's not worthwhile right now... Did take some out years ago, and wish I still had them.

As far as I know, any IRA (mine are Traditional) requires the form... see the note on the last page that states facsimiles not allowed.

Keeping money "local" makes sense today, but we've used Money Market funds in the past, when some the larger National banks... ETrade, Metropolitan Life Bank, Discover and a few others were paying a full percent or more than most banks, and even more in Jumbo accounts. Some were paying about 6%.
Wasn't too smart to do that at the time, but we were, are, and will be ultra cautious. Still spend each dollar as if it were the first one I earned as a lifeguard @$.75 /hr.

 

[Alan]

As far as I know, any IRA (mine are Traditional) requires the form... see the note on the last page that states facsimiles not allowed.

Oh Joy, something to look forward to

 

[retire2020]

Not retired yet..But I'm planning to keep 60K for emergency fund when I retire for emergencies like new roof/washer/dryer/heater/ac/car breakdown..etc. It's about the same amount I keep now while working but that's for income loss.

 

[Animorph]

We keep enough in the checking account so that we don't worry about overdrawing it with a big payment.

As for emergency funds, I think you still need to consider two things. Do you have enough cash to sustain you through some type of natural disaster (or a bank freeze) when most ATM's are shut down. That's something you hear about once in a while, like with Superstorm Sandy. And do you have enough to sustain you through a market shutdown, like 9/11? It may take a while before you can access your brokerage account or can sell something if their computers are damaged or the market is unexpectedly closed.

 

[Sue J]

There is a local bricks and mortar bank nearby that has a 1.2% savings account. You can keep any amount there but the 1.2% is only good on the first $20,000, over $20,000 the rate drops. So we keep $20,000 and make 6 electronic transactions from the required checking account every month. The savings account covers about 9 months of expenses.

The savings started out at 2% with a $50 gift card and a $100 bonus so it was worth the effort to set it up and jump through a few hoops. Now it all runs automatically with 6 of our regular bills.

In case of a natural disaster or other issue that keeps banks closed I have a few hundred in cash in the house.

 

[jebmke]

We hold no cash. Our entire portfolio is our emergency fund.

 

[rayvt]

We hold no cash. Our entire portfolio is our emergency fund.

+1

 

[brewer12345]

We keep enough in the checking account so that we don't worry about overdrawing it with a big payment.

As for emergency funds, I think you still need to consider two things. Do you have enough cash to sustain you through some type of natural disaster (or a bank freeze) when most ATM's are shut down. That's something you hear about once in a while, like with Superstorm Sandy. And do you have enough to sustain you through a market shutdown, like 9/11? It may take a while before you can access your brokerage account or can sell something if their computers are damaged or the market is unexpectedly closed.

I think the natural disaster thing is important. We keep a quantity of folding money around the house for exactly this reason (plus water, MREs, gasoline, a generator, lots of shotshells, etc.).

I will be pulling the plug for ESR next year. I am sitting on about 100k in cash, CDs and I bonds. Much of this is just part of my fixed income allocation, but since it is not market sensitive it will serve as the obvious place to draw on and should be enough to ride out market kerfluffles.

 

[growing_older]

I use about a half month income as a buffer in my checking account. It is in essence the first tier emergency fund for anything that I cannot simply put on a credit card (like new appliance, home or car repair). If I draw it down, I replenish with the following paycheck or two as needed. I also accumulate some escrow accounts throughout the year. These total about 3 months income and are in interest bearing bank accounts and if necessary I will raid them for a short term emergency. I have some supplies and a small amount of cash in the house for natural disasters or sudden need for late night pizza.

The rest of the "emergency" fund is to cover long term job loss and I actually invest it in my usual asset allocation. This is contrary to all instruction and if the job market gets terrible at the same time the stock market gets terrible I will be forced to sell something when it's down. But a long term job loss necessitating using this fund will be a long slow draw, not unlike an actual retirement, so I don't feel the need to have it all in actual cash. As a result of investing this way for several decades, that fund has grown to several multiples what it would be if I left it in CDs and money markets, so now even if the market is down 70% and I liquidate the whole thing (a vanishingly unlikely scenario) I'm still ahead.

 

[tuixiu]

On the "forced to sell when down thing" I'm not retired so haven't sold much of anything (just when rebalancing) wouldn't someone with an allocation of stocks and bonds likely be selling the bonds anyway if the stocks are down?

Like if I'm 50/50 and stocks take a 10% beating, wouldn't I be selling some from the fixed income allocation to both get my living expenses and rebalance?

 

[samclem]

On the "forced to sell when down thing" I'm not retired so haven't sold much of anything (just when rebalancing) wouldn't someone with an allocation of stocks and bonds likely be selling the bonds anyway if the stocks are down?

Like if I'm 50/50 and stocks take a 10% beating, wouldn't I be selling some from the fixed income allocation to both get my living expenses and rebalance?

Sometimes some bonds move in the same direction as stocks. For example, if interest rates headed up in a hurry, it would hurt both the stock market and the value of long-term bonds. That's when having cash (CDs, MM funds, etc) can be handy. Obviously, shorter term bonds behave more like cash--but right now they also have lower yields.