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Required Emergency Funds -- How much in retirement
Old 06-14-2009, 03:02 PM   #1
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Required Emergency Funds -- How much in retirement

Hi all,

I think I have a pretty good handle on most of the money side of retiring, but am struggling a bit with one thing.

Before FIREing, I will have a separate emergency fund set aside. This will primarily be LTC "insurance", since most smaller emergencies can be covered out of planned income.

Given
  • FIRE age of late 50s
  • income (pension/SS/savings) can cover about 30% of annual LTC costs in the "worst" case where both of us are still alive
  • good medical insurance
  • house with current value of $400k (can be sold for emergency funds if required)
  • no withdrawls from emergency fund expected unless required for LTC (and hopefully not for at least 15-20 years)
Under these circumstances, how much of an emergency fund would you want/recommend when you retired (realizing that a larger emergency fund means retiring later)?

Thanks for your thoughts.
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Old 06-14-2009, 03:54 PM   #2
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Here is a recent thread discussing emergency funds and retirement: What if you use up your emergency fund?
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Old 06-14-2009, 05:09 PM   #3
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It is just a matter of semantics or labels. In reality you don't need an emergency fund. Instead, you need a portfolio with assets allocated among equities, fixed_income, cash and other. "Other" might be commercial real estate, rental property, REITs, a collateralized commodity futures fund or other oddball investment that you believe is not correlated to the other asset classes.

Note that "cash" is a separate asset class. You might wish to have 12% to 20% of your portfolio in cash which can include any fixed_income that is short term or guaranteed such as CDs, money markets, and even an ultra-short-term bond fund. The 12% to 20% maps out to 3 to 5 years of expenses since you are using the rule-of-thumb 4% safe-withdrawal rate. You can make it multi-tiered if you like: 8% in CDs, 4% in a money market and 15% in short-term TIPS or other government bonds.

Do you see how calling this an "emergency fund" is kind of ridiculous? And do you see that you don't really need an "emergency fund" with 5 years of cash available?
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Rephrased as LTC question
Old 06-14-2009, 06:38 PM   #4
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Rephrased as LTC question

I obviously wasn't clear in my question. Emergency fund has strong connotations.

Let me ask two different questions, which may be more straight-forward and can help get to the same answer:
  1. How many years of self-insured LTC do you/will you/would you have provisions for? (Note -- in my case, I am self-insuring from a separate fund primarily for this purpose--assume no impact to other pots of money)
  2. Given that we are retiring in our late 50s, and LTC likely won't be required until 70s+, would you be comfortable having less than that many years of LTC coverage at retirement, assuming real growth of this money with a 50/50 stock/bond allocation? (For reference, 3% real growth until we're 70 is a 35% real increase; until 75 is an 55% real increase.)
Thanks again.
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Old 06-14-2009, 08:13 PM   #5
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I have not set a specific amount for an emergency fund either a a dollar figure or % of annual expenses. I do have about 8% of out portfolio in a Roth account which is available for emergencies and about 8% of our portfolio is in a credit union account which is used to fund activities. Money flows in & out but it is a buffer and can be used for emergencies.
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Old 06-14-2009, 08:17 PM   #6
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If you need money for LTC, you would not spend it all in a week. It would be something that would get spent monthly over a few years. Thus, it is just another expense exactly like paying rent, paying for groceries and eating out, paying for vacations, etc. I don't think one needs a separate category for it, nor does one need a separate asset allocation for it.
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Old 06-14-2009, 08:46 PM   #7
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OK, so "emergency fund" usually refers to liquid assets intended to be used during an unexpected loss of income, or for unanticipated urgent living expenses. They tend to sit on the side until misfortune calls them back in to play.

LTC insurance is a whole other bag, albeit a difficult one. My sense is that you are mixing the two together.

My suggestion: decide if you need LTC insurance. Many here would say no, but it's an individual call. Vote yes or no, and if you decide you need it buy it (at age 60 I have not decided to buy it).

Emergency funds are kind of moot once you have retired since your living expenses are folded into your retirement portfolio and planning. But I would not tie the two together - it's not an "either - or" decision.
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Old 06-14-2009, 10:38 PM   #8
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I agree with Rich that LTC insurance is an individual call. My wife and I
felt more comfortable buying LTCI in our late 50's.

Cheers,

charlie
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Old 06-15-2009, 10:41 AM   #9
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Quote:
Originally Posted by Rich_in_Tampa View Post
My suggestion: decide if you need LTC insurance. Many here would say no, but it's an individual call. Vote yes or no, and if you decide you need it buy it (at age 60 I have not decided to buy it).
I think it depends on a number of circumstances. Most of what I read seems to imply that late 50s/early 60s is the best time to buy.

If you buy before then, you are likely to pay for many years without any benefit. And while the base rates are lower, they would likely also be not inflation-adjusted. (For someone in their 40s, say, an inflation kicker would likely triple the premiums from what I've seen.) Also someone buying young may well see the public policy changes on health care and LTC which might mean spending money on something that could be covered without LTC in the future.

Wait too long and the premiums become ghastly, with or without an inflation kicker.
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Old 06-15-2009, 10:45 AM   #10
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Realize also that delaying the purchase increases your risk of developing a pre-existing condition which can also increase LTCI rates significantly.

One would almost think the insurance companies had the whole thing rigged in their favor...
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Old 06-15-2009, 11:31 AM   #11
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I don't want LTCI for a number of reasons, none of which are relevant to this thread. But like the OP, I don't have it and intend to self-insure.

Long term care is expensive, and when more of the baby boom generation start needing it the price is guaranteed to skyrocket. We cannot accurately predict what the cost will be, IMO, and so I think that those of us who plan to self-insure will need to over-engineer this to some extent rather than planning on a specific number of years' expenses.

I intend to leave the principal of my portfolio completely intact and growing. (To do this I plan to reinvest the capital gains and some of the dividends, while spending some of the dividends.) In the event that I need long term care, I will use as much of my portfolio as is needed for that and I think it will be sufficient. If I don't need long term care, my daughter will inherit that much more money.
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Old 06-15-2009, 12:03 PM   #12
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Long term care is expensive, and when more of the baby boom generation start needing it the price is guaranteed to skyrocket.
For a reference point, my FIL's nursing home care is currently running north of $12,000 per month including physical and speech therapy. That doesn't include the cost of the 20 or so medicines he's taking. He scrimped and saved all his 89 years, living on less than $25K. If he were aware of what his care is costing it would probably kill him.
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Old 06-15-2009, 12:46 PM   #13
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For a reference point, my FIL's nursing home care is currently running north of $12,000 per month including physical and speech therapy. That doesn't include the cost of the 20 or so medicines he's taking. He scrimped and saved all his 89 years, living on less than $25K. If he were aware of what his care is costing it would probably kill him.
That's outrageously expensive, I agree. I wonder how long he will need physical and speech therapy before his doctors decide he has benefited from it as much as possible.

If I were in his situation, I would only be able to pay for such therapies for a finite length of time, I would imagine. I still want to self-insure, as I have little to no faith in the ability of long term care insurance to pay me much by the time I might conceivably need it. They are stuck with the same escalating costs and I suppose they must either raise their rates or go under.
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Old 06-15-2009, 12:54 PM   #14
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For a reference point, my FIL's nursing home care is currently running north of $12,000 per month including physical and speech therapy. That doesn't include the cost of the 20 or so medicines he's taking. He scrimped and saved all his 89 years, living on less than $25K. If he were aware of what his care is costing it would probably kill him.
Just curious, is FIL actually paying that amount or are Medicare and Medicaid coming into play? If Medicaid, do you feel there would be better care and/or more options if he were private pay?

Personally, the key factor in my analysis of whether to buy LTCI or self-insure is whether DW could become impoverished if I were to need expensive care, such as your FIL, for a prolonged period of time. It's a tough call...... Give up 5% - 10% of our income now for insurance premiums or take the chance that, in an extreme case of large expenses for a long time, DW wife could wind up in tough financial times.
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Old 06-15-2009, 12:56 PM   #15
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Personally, the key factor in my analysis of whether to buy LTCI or self-insure is whether DW could become impoverished if I were to need expensive care, such as your FIL, for a prolonged period of time. It's a tough call...... Give up 5% - 10% of our income now for insurance premiums or take the chance that, in an extreme case of large expenses for a long time, DW wife could wind up in tough financial times.
Going back to a recent thread about this, I think it also depends on whether you have heirs, whether you are concerned about preserving assets to pass to your heirs, and whether you're willing to take the chance of being stuck in a Medicaid facility when you run out of money.

Lots to think about. But for someone under, say, 50-55 years old I just see so many economic, social and political variables changing between now and age 60 that it's a major leap of faith to sign up for LTCI now.
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Old 06-15-2009, 01:17 PM   #16
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Going back to a recent thread about this, I think it also depends on whether you have heirs, whether you are concerned about preserving assets to pass to your heirs, and whether you're willing to take the chance of being stuck in a Medicaid facility when you run out of money.

Lots to think about. But for someone under, say, 50-55 years old I just see so many economic, social and political variables changing between now and age 60 that it's a major leap of faith to sign up for LTCI now.
Leaving an estate is a factor for me (I have kids and grandkids) but is not nearly as important as the issue of impoverishing DW.

I consider myself self-insured for LTC but a long and expensive stay in a nursing home would test the limits, that's for sure.

One of the most interesting financial planning projects I've done is writing instructions for DW to follow if I were to be totally incapacitated and my care required $80k/yr out of our portfolio. It was quite detailed for the first two years and more general after that. I plan on refreshing the instructions annually since my age at the time of incapacitation is a key factor. I'd recommend anyone who considers themselves self-insured, and whose spouse is not the financial lead dog, to do this. It's an eye-opener.

The current state of LTCI is what causes me to hesitate. If I totally trusted the provider and believed they would/could pay as promised, especially if the premium was under 10% of my current RE budget, I'd really be tempted. My confidence level is low however, so for now no LTCI.
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Old 06-15-2009, 01:25 PM   #17
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That's outrageously expensive, I agree. I wonder how long he will need physical and speech therapy before his doctors decide he has benefited from it as much as possible.
Like most health-related issues, the decision isn't black and white - nor is it entirely up to the doctors.

The progress from his therapy was gradual but measurable -then he had a setback. He improved to the point he could begin eating rather than being fed entirely by tube, got pneumonia and had to be hospitalized, lost the ability to eat, started all over again.

At what point do we say "no more therapy". I don't have an answer.
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Old 06-15-2009, 01:34 PM   #18
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I have little to no faith in the ability of long term care insurance to pay me much by the time I might conceivably need it. They are stuck with the same escalating costs and I suppose they must either raise their rates or go under.
DW and I have had LTC policies for 9 years. The ins company knows exactly what their maximum liability is on each of us - the policy covers up to three years of care limited to a maximum of $100 per day increasing at 5% per year (now at $155/day). Escalating rates and increases in the cost of care do not impact the cost to the insuance company, so I don't expect a huge increase in rates once our 10 year guarantee of premium expires next May.

Unfortunately, I could be wrong.
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Old 06-15-2009, 01:47 PM   #19
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Just curious, is FIL actually paying that amount or are Medicare and Medicaid coming into play? If Medicaid, do you feel there would be better care and/or more options if he were private pay?
He is still within his first 100 days of Medicare skilled NH coverage coming out of the hospital, so Medicare is covering a majority of the NH and therapy costs. That will end in approximately four weeks and it will become private pay for everything other than doctor visits.

The NH he is in does not accept new Medicaid patients. However, since he is already a resident on private pay, if he spends down his assets to the point he goes on Medicaid the NH will not force him to leave.

I can't speak for other NHs, but I see no difference in the care he gets and the care given to any of the other residents, some who are almost certainly on Medicaid as this NH has been their home for many years.
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Old 06-15-2009, 02:08 PM   #20
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It looks to me like OP Travel4Fun is asking how much $ to set aside to self-insure against LTC, less the 30 percent the other assets would provide, and would not touch this amount except for LTC.

From what REWahoo has posted (and this is also true of my MIL's LTC policy), a LTC policy might cover $150/day and be in force for 3 years. You could multiply those out for a starting point, in simple math, of $165,000. As a lump sum set aside earlier, you would hope that it would grow, too. (Of course, OP's house worth $400,000 could also be seen at his/her LTC self-insurance fund, so no separate pile of $$ would be necessary.)

So for a ballpark match to what an LTC policy would pay, lock up $165,000.
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