Emergency Money

[razztazz]

Looking for other people's points of view.

I have 2 separate "Bags o' money". The big one is my retirement stash. The one I use to pay myself.  The other one is just money sitting around, essentially, "off the books" that I keep in reserve for "emergencies".  ie: Anything that comes up that would cause me to exceed my withdrawl rate.

Examples: Any traveling that is in excess of what's scheduled. Death in family etc.  Maybe insurance deductable if I ever get "hit" hard enough to have to use it.  Anything else I can't think of. (This IS emergency money we're talking about)

This is not a mere $2,000.00, or $5,000.00 or even $10,000.00 bucks. It's closer these days to $50,000.00.  In my life my total cumulative emergency spending has never approached this level.  And in fact almost ALL of life's emergencies have been related to having a job. (Need a car RIGHT NOW!.... New in town, need an apartment RIGHT NOW! Start throwing some heavy-duty bread around.) Now, of course, I have no job ergo fewer emergency-causing situations.

The question is: Should I just say "Screw it!" and dump that emergency money into the Big Pot where is it has more potential? And if I do have an emergency ..well... so I spend a little more that year.  Or should I keep ALL the emergency money in The Bunker to cover emergencies for the next 40-50 yrs?

Currently the emergency money is in Money Market funds and I-Bonds. Nice and safe. There when I need it.

 

[intercst]

Looking for other people's points of view.

I have 2 separate "Bags o' money". The big one is my retirement stash. The one I use to pay myself.  The other one is just money sitting around, essentially, "off the books" that I keep in reserve for "emergencies".  ie: Anything that comes up that would cause me to exceed my withdrawl rate.

Examples: Any traveling that is in excess of what's scheduled. Death in family etc.  Maybe insurance deductable if I ever get "hit" hard enough to have to use it.  Anything else I can't think of. (This IS emergency money we're talking about)

This is not a mere $2,000.00, or $5,000.00 or even $10,000.00 bucks. It's closer these days to $50,000.00.  In my life my total cumulative emergency spending has never approached this level.  And in fact almost ALL of life's emergencies have been related to having a job. (Need a car RIGHT NOW!.... New in town, need an apartment RIGHT NOW! Start throwing some heavy-duty bread around.) Now, of course, I have no job ergo fewer emergency-causing situations.

The question is: Should I just say "Screw it!" and dump that emergency money into the Big Pot where is it has more potential? And if I do have an emergency ..well... so I spend a little more that year.  Or should I keep ALL the emergency money in The Bunker to cover emergencies for the next 40-50 yrs?

Currently the emergency money is in Money Market funds and I-Bonds. Nice and safe. There when I need it.

I base my decision on how much of your overall financial assets are tied up in the $50,000 emergency fund. If you have more than $1 million and the $50,000 represents less than 5%, it's probably not unreasonable.

intercst

 

[brewer12345]

I hate to tell you this, but your separate pots of money are a fiction of your imagination. In the real world, you actually have one portfolio with an asset allocation of $X to your target and $50k to cash and I bonds. If that makes you happy, its NBD. For most ERs, I suspect that $50k is more or less rounding error anyway, from a portfolio allocation perspective.

 

[preben]

If I was happy with the risk profile of my "invested" portfolio I would just dump the cash in there too.

More for practical reasons than return reasons, I would however have about 1 years expenses(SWR) in the bank/MM-account. Cheers.

 

[treypar]

I try to keep 6 months expenses in the vanguard tax exempt mm and invest the rest.

 

[razztazz]

I like Ben's answer. I am a 60%/40% guy so I am always comfortable with the general allocation. I also hate lots of "moving parts" and sub-accounts, and "things with an asterisk".

I think maybe just punching up my regular checking account by a few thousand ($2,000-$3,000..?TBD) to cover realistic probability of short term emergencies is likely all I'll need. Then just disperse the rest into the larger machine.

 

[ShokWaveRider]

RazzTazz:

I see where you are coming from. I like a padded section also. What I do is keep the money in ING. It pays a good interest rate and is only a couple of days away in a crunch.

SWR

 

[razztazz]

Yeah Shock, the Pads! I like More than enough....and then just a little bit more. (Then a little extra just in case)

Probably has something to do with bein' po' and watching everybody else spend like there's always more where that came from, telling me I worry too much...but who's laughing all the way to the bank NOW?!

But the past several yrs of  surviving quite easily, and not having any emergencies, that "dead money" sitting over there was starting to make me feel a little foolish. I figure , if nothing else I can dump it into my 40% fixed income. That won't change the risk factor at all,  and technically would lower my withdrawl rate. SOMEDAY...I might need a......something or other that exceeds my regular scheduled withdrawl but by then I should be far enough ahead none of this will matter.

 

[Lazarus]

I usually keep about 10K outside my 401K for emergencys. So far that has been more than enough. I would rather invest and pay down debt (only the house) than keep a really big stash. If your over 59 1/2 you can always get at it so maybe you need less? 10K is a few percent of my NW.

 

[Nords]

But the past several yrs of  surviving quite easily, and not having any emergencies, that "dead money" sitting over there was starting to make me feel a little foolish.

Same here. We keep one years' cash (expenses) wherever we can get the highest money-market return.

We keep a second years' stash in a CD. That used to be one big one-year CD but we realized that it makes much more sense to break it up into smaller five-year CDs. That way we can invade principal if necessary in small increments with only a three-month penalty. Eventually it'll be a five-year ladder of small five-year CDs adding up to a total of one years' expenses.

"One years' expenses" is a moving target. Very few (if any!) studies examine the effect of consumers locking shut their wallets when the bad times hit (Depression, job loss, nuclear war, etc). Your year of expenses during a crisis may be as little as half of what you normally spend, so that stash might be able to be even smaller!

 

[sgeeeee]

I hate to tell you this, but your separate pots of money are a fiction of your imagination. . .

This was my thought too. Slice and dice your portfolio into however many pots you want. In the real world you only have one portfolio.

 

[razztazz]

This was my thought too. Slice and dice your portfolio into however many pots you want. In the real world you only have one portfolio.

sg and brew I know, there's only onme bag of bucks. I call it "my money" but you missed the whole pernt. Pulling a large chunk of emergency money out of a stash could affect the withdrawl rate and longevity. That is what I have been trying to avoid with the separate "emergency fund" that is NOT counted as the "Money I live on day after day year after year." Keeping it out does not affect the withdrawl rate of the "paycheck" as it were. So yes, it IS 2 separates sources with 2 separate unconnected uses, and essentially 2 separate withdrawl rates, no matter how you look at it.

 

[TromboneAl]

I also don't get the separate-pots business (apart from taxable and non-taxable). I can take money out of my taxable Vanguard funds at a moment's notice.

 

[unclemick]

The separate pot idea only comes up if I try to get cute with taxes - alas no Roth to speak of - but Trad IRA(fully taxed) vs cap gains/losses spread in individual stocks - pension income - and now SS. Divs on stocks are in there also.

An unplanned big hit - trad IRA and taxes or individual stock pot with a spread of tax possiblities.

Yuck! Juggling in a planned manner is fun enough.

 

[dandan14]

Why not put $40,000 in 3 and/or 5 year CDs, and keep the rest in a money market? In the off chance that you need more than $10k, then you could forfeit the interest penalty (usually 3 months) on a few of the CDs, and get some more cash.

A slight variation to this would be to build a CD ladder of 1,2,3,4, and 5 year CDs. That way if you need an extra bit of cash, you could cash in the one with the least penalty.

 

[shiny]

As DH refers to it "my cushions" are those bits of money here and there that are not included in "the plan".

I'm a big worrier and those stashes make me less worried. They aren't dead money, (just a bit lethargic) but they help me sleep at night so that is a return in itself! Its a bit more than average, but not enough to be holding us back from ER.

 

[REWahoo]

I agree we all have only one portfolio, but what are your thoughts on having a separate pot to fund anticipated SS income prior to SS eligibility?

For example, you retire at age 57 and anticipate receiving $1,000 per month from SS at age 62. You will need to fund the $12,000 per year from your nest egg for the 5 year period before SS kicks in, a total of $60,000.

Assuming a nest egg of $750,000 and an initial withdrawal rate of 4%, your first year withdrawal should be $30,000. But wouldn't it make more sense to carve that $60,000 "pot" needed to fund your 5 year SS shortfall from your nest egg? This would give you a first year withdrawal of $27,600 ($750,000 - $60,000 = $690,000 x 4% = $27,600). The $27,600 withdrawal plus $12,000 from your pre-SS fund will result in a first year income of $39,600 vs. $30,000 in the traditional 4% SWR approach.

Is this a logical or am I missing somehing here?

REW

 

[sgeeeee]

. . .
Is this a logical or am I missing somehing here?

If considering money in separate pots makes you feel good or accomplishes something for you, then do it. I'm not sure what people are considering to be "pots" of money. You could argue that asset allocation is a form of multiple pots of money. Bond ladders might be called a separate pot. Banking accounts . . . But since you can and will transfer dollars between those kinds of accounts to achieve your investment goals, you really only have one portfolio. It is allocated however you have chosen to allocate it.

As for your case, the 4% rule is based on net worth, invested in a balanced portfolio and a 30 year retirement timeframe. It assumes your spending will increase to match inflation.

Your net worth should include the current value of your future social security benefits, so that your withdrawal rate prior to collecting ss. You are neglecting inflation and earning in your calculations. How do you propose to invest your $60,000 pot? is it part of your balanced portfolio? If so, why split it out? If not, then the 30 year, inflation adjusted, balanced investment analysis does not apply.