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What if you use up your emergency fund?
Old 06-06-2009, 03:43 PM   #1
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What if you use up your emergency fund?

Do you think it would be necessary to factor "saving for a new emergency fund" into one's retirement income calculations?

I don't, of course, mean the emergency fund for "if I lose my job," but the one for "If my house and car need major repairs at the same time, or something else happens that isn't covered by my insurance."
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Old 06-06-2009, 03:51 PM   #2
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Quote:
Originally Posted by Amethyst View Post
Do you think it would be necessary to factor "saving for a new emergency fund" into one's retirement income calculations?

I don't, of course, mean the emergency fund for "if I lose my job," but the one for "If my house and car need major repairs at the same time, or something else happens that isn't covered by my insurance."
I plan to have an emergency fund during retirement exactly for these things and I expect to have it at a similar size to what I have pre-ER (ie 8 months of expenses).

This is because because "OMG I have lost my job", I need to find a new one, could be replaced by "OMG the company pension plan has gone belly up and/or the retiree health insurance has been axed", I need to find a j*b.
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Old 06-06-2009, 03:58 PM   #3
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Once retired, my "emergency fund" was combined with more cash to become the "X years living expenses in cash" portion of my asset allocation. I don't see any reason to keep them separate, but others may. Depends on how anal detailed you are...

Note: I have no pension to lose and am optimistic I can hang on with my health insurance until eligible for Medicare coverage.
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Old 06-06-2009, 03:59 PM   #4
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Do you think it would be necessary to factor "saving for a new emergency fund" into one's retirement income calculations?
You could have one fund and name it "cash reserves", which is what I have done for a while. It covers all contingencies. At times it may have a year or two of expenses in it.

You make the rules; it's your cash.
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Old 06-06-2009, 04:00 PM   #5
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I'd say it's a matter of personal comfort. Some don't seem to think one needs an "emergency fund" separate from the rest of their portfolio, but would want to make sure enough is in safe and liquid investments such that if they had to throw $5,000 at a new roof, it would neither bust their retirement nor force them to sell equities low.

Personally, I see myself wanting to have an emergency fund when I retire. But because it will only have to cover major unexpected expenses, not loss of income, mine would probably quite a bit smaller than it is today -- like $10-20K in today's dollars. In today's economy people who need the e-fund to cover loss of income from a layoff would be wise to have more like 9-12 months of expenses.
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Old 06-06-2009, 04:11 PM   #6
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Right now I budget for things such as root canals, house air conditioner cratering, new tires for the car, and so on. I feel like I can sort of expect several of these to happen each year (and if they don't, the money carries over to the next year). I also budget enough to be saving up to buy my next car in cash. As I take money from my emergency fund when these things come up, I also add to my emergency fund on a regular monthly basis.

So, in a sense I am saving for my emergency fund all the time. If it sinks too far, I save more. It isn't static.

In retirement, I might mix it in with my cash reserves like REW does. I don't know yet.
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Old 06-06-2009, 05:36 PM   #7
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Quote:
Originally Posted by REWahoo View Post
Once retired, my "emergency fund" was combined with more cash to become the "X years living expenses in cash" portion of my asset allocation. I don't see any reason to keep them separate, but others may. Depends on how anal detailed you are...
Did someone call my name?

I essentially keep 2 sub-portfolios...the investing approach for each is like night and day.

1. a much larger long term retirement (age 62 and older).

2. a short term (less than 5 years) set of income investments for OMG situations that could happen between now and age 56 (FERS pension) and age 62 (SS). In the absence of calamity, this little guy will be joined up with the big enchilada once I start drawing SS at age 62.

To answer the OP's question, #2 is my "saving for a new emergency fund" vehicle. It is the one I continue to DCA into.
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Old 06-06-2009, 07:18 PM   #8
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You could have one fund and name it "cash reserves", which is what I have done for a while. It covers all contingencies. At times it may have a year or two of expenses in it.

You make the rules; it's your cash.
So, if that fund gets used up after retirement, how does it get replenished?
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Old 06-06-2009, 07:21 PM   #9
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So, if that fund gets used up after retirement, how does it get replenished?
If you have an asset allocation that includes a certain amount in cash and short term investments and that allocation gets lower, then, you replenish annually during the rebalancing process.

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Old 06-06-2009, 08:24 PM   #10
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I've never really had an emergency fund. I'm happy to sell equities if I need to, they're liquid enough. I budget for "unexpected" roof repairs, appliance replacements, car repairs, etc. I haven't run into anything the budget couldn't handle, so far. But even that money tends to be invested in equites.

The alternative is to keep a "permanent" cash allocation. I'd rather sell equities at some random time than leave it in cash all the time.

As far as "refilling", it's an emergency fund. It shouldn't need a predictable filling, nor a yearly filling. It should already exist at the start of retirement and hopefully grow with inflation and never be required. On the other hand, your house/auto/other replacement and repair budget will require a yearly contribution, even if you may not use it in any one year.

I think we're using different definitions of emergency, but that's how I have done it for about 30 years now,
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Old 06-06-2009, 08:51 PM   #11
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My thoughts on replenishing the emergency fund, is that my income as a retiree will be analogous to my "paycheck" when working.

Just like I contribute a steady amount each month to the emergency fund now, I would do the same as a retiree. But then, if something big really lowers the amount in my emergency fund below an acceptable level, I would make it a priority to replenish it pronto. Just like I would LBYM a bit more to save from my paycheck when I need to replenish my emergency fund right now, when I am retired I can save from my monthly income as a retiree in order to replenish my emergency fund.

Maybe after I have been a retiree for a while, I will change the way I do things. But at least at the beginning, it is easier for me to treat my income streams as a paycheck and do things as I have always done in the past.
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Old 06-07-2009, 10:40 AM   #12
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My thoughts on replenishing the emergency fund, is that my income as a retiree will be analogous to my "paycheck" when working.

Just like I contribute a steady amount each month to the emergency fund now, I would do the same as a retiree. But then, if something big really lowers the amount in my emergency fund below an acceptable level, I would make it a priority to replenish it pronto. Just like I would LBYM a bit more to save from my paycheck when I need to replenish my emergency fund right now, when I am retired I can save from my monthly income as a retiree in order to replenish my emergency fund.

Maybe after I have been a retiree for a while, I will change the way I do things. But at least at the beginning, it is easier for me to treat my income streams as a paycheck and do things as I have always done in the past.
W2R,

That's how I see things, too (need to factor in a consistent savings amount, after retirement, for emergencies and repairs). Thanks to everyone for bringing to my attention that "repairs" should be a separate, consistent savings item, not part of the "emergency" fund. For some reason, we have always thought of them as the same thing. Husband has been somewhat unbelieving of the "after-retirement" needs I have been bringing to his attention...thinks I'm a pessimist, etc. [which I am, and a good thing too ]

Freebird, I am intrigued by the concept of 2 different investing strategies for the "OMG" fund and the long-term fund. Would you care to post details? Or you could PM me if you'd prefer.

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Old 06-07-2009, 11:16 AM   #13
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I think there is a constant stream of "emergency unexpected expenses". It's always something. House, car, health, equipment/appliance failure, casualty losses, etc. Why not budget an estimated amount for higher than usual expenses? Plan for the unexpected basically. That is what I'm planning on doing.
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Old 06-07-2009, 11:26 AM   #14
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Like REWahoo, now that I'm retired my emergency fund is just a piece of the liquid portion of my portfolio. That liquid portion is several years' expenses.

When I developed my retirement budget I included a contingency line to account for large, unexpected expenses. If not spent, it's not withdrawn -- but the budget has to work as if it were.

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Old 06-07-2009, 11:35 AM   #15
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...Freebird, I am intrigued by the concept of 2 different investing strategies for the "OMG" fund and the long-term fund. Would you care to post details? Or you could PM me if you'd prefer.

Amethyst
Sure. No rocket science going on here. Well, maybe a little...
I invest with a very analytical approach. I keep the emotion out of it, just like I would conduct a lab experiment. I look at the boundary conditions (market), propose a hypothesis (what if?), test it (portfolio tracking over a year), and do a lab report *.

Overall AA = 40/60, combo of Account #1 and Account #2.
I can figure out the AA of each if you want me to.

Account #1 - I keep my real long term retirement fund in a zero fee TDAmeritrade account. I grew it to a certain size while w*rking. I no longer contribute to it, but reinvest all distributions. The only cost is the MF expense ratios. I own 1 ETF, VTI. The rest are all MF from VG and Dodge & Cox. I just bought some CELG stock cuz I felt like it after I "found" less than $1K doing nothing in the TDA sweep money market account earning 0.25% interest. Big whoooooo.
I do an occasional exchange between funds if it makes sense for TLH. This account is set in Park with the emergency brake on (no withdrawals). I am now looking at a 11.5 year horizon until I turn 62.

Account #2 - the OMG short term stash is completey independent of Account #1. It is with VG directly.
I use my 2 FIRE income streams to cover current expenses. However...I pay myself first. I am religious about monthly DCA and cut out a lot of "mad money" expenses to accomodate that. I usually do $600/mo, have gone as high as $1000/mo in fall 2008 , and currently do $800/mo. All of this goes into my short term account.
The core funds in this subportfolio are VWAHX and VNYTX, and very recently added VHDYX and VYFXX. With the exception of VHDYX, I am acting like an income investor, and view VWAHX, VNYTX, and VYFXX as my OMG emergency funds. These 3 funds pay dividends that are almost completely tax free for my zip code.
I view the dividends as a partial "match" mechanism for my DCA, except of course VHDYX. My stake is too small right now to be a big player.
More bang for the buck, the joy of componding interest every 30 days, and to the IRS.
NAV is usually pretty stable on munis but last year knocked it back a little (-10.5% on VWAHX, -3.7% on VNYTX for 2008
per M*).
Life happens. NAV recovery has been OK so far in 2009.

* Just kidding about the lab report.
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Old 06-07-2009, 11:58 AM   #16
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So, if that fund gets used up after retirement, how does it get replenished?
I continue to add more money to the pot on a semi-regular basis as I collect excess $ in my checking account. It's not an exact thing, but if I need to use some of the cash reserves to pay for a large expenditure, I just try to add more money to the pot over time in order to build it back up.

The fund has never gotten "used up", or even close to that. If that ever happened though, I would have to strip off funds from my other resources and build it back up.
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Old 06-07-2009, 01:25 PM   #17
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