Reserve Money

[Shanky]

I never remembered having an emergency needing $500,000 or even $5,000. As far as I can remember recently, my biggest emergency spending is around $1,500 and that's when my 13-year old water heater leaked and needed replacement. DW Dad passed away - plane ticket & expenses was $1,200. Getting sick suddenly - medical insurance took care of most. Copay for emergency room was $100 and after diagnosis walked out the same day. Blew a tire - $200. I pray I don't need a big emergency, but there's the entire nest egg if needed. Can always sell stocks, bonds, etc ... in a few seconds.

You can have a $1 million or $10 million in reserve, a reserve Jet if you need to fly to get away from catastrophe, a reserve house if your house got hit by a meteor and still not feel safe. Feeling safe is all in the mind. You could croak tomorrow in your sleep and that's the end of it. Just go thru life without so much fear and I think you'll be ok.

This.

 

[F-One]

Sorry for not responding earlier. 1st reserve is in cd's and bonds, earning average of 2%, but that will fluctuate based on cd maturing and reinvestment interest rates.

The reserve is money I don't count on when running FireCalc, i-orp, retirement calculations. I should have worded it and question better.

The question might be better asked, when you run retirement calculations do you add all your resources into retirement calculations or keep some reserve and if you keep some reserve, how much?

I know I am crazy, just ask DW, Just wondering how crazy.

 

[scrabbler1]

Many people who have posted here have layers, or tiers of money whose availability, preservation of principal, and rates of return vary.


I keep about $750 above the minimum balance requirements in my local bank's interest-free checking account as a cushion, or surplus, available to cover immediate, unforeseen expenses. This money is easily accessible via personal check, debit card, and cash from ATM. I tap into this cushion fairly often. This doesn't count using my credit cards to hold me over for a few weeks until the bill arrives (and gets paid in full, of course).


My next tier is about $40k I keep in an intermediate-term muni bond fund. It is not quite as liquid but I do have checkwriting privileges so it is pretty available in that regard. I would need 2 days to get money from there transferred to my local bank's checking account. This account is earning tax-free (mostly) interest every month. I rarely need to tap into this account, maybe once a year tops.


After that, I have other mutual funds which lack checkwriting and/or have higher rates of return and/or have somewhat larger variation in principal. I used one of those when I bought my last car 9 years ago.

 

[REWahoo]

The question might be better asked, when you run retirement calculations do you add all your resources into retirement calculations or keep some reserve and if you keep some reserve, how much?

IMO, not including all your investable financial assets in your calculations is just playing mind games with yourself. But since we all know playing with yourself is completely normal, don't worry about it - you won't go blind.

 

[Danmar]

We keep a fair amount in cash earning very little but it represents a very small percentage of our invested assets, maybe 2-3%. Not really to cover emergencies, but rather the usual cash flow lumpiness associated with big expenditures or dividend receipts. Our portfolios are in margin accounts and would support very high margin loans if a very big emergency were to arise. Really can't think of an emergency bigger than say $500,000 though? Being Canadian it wouldn't likely be health related. Maybe a ransom demand? But don't travel to risky places.

 

[Mulligan]

Heck, just have a credit card with a 20K limit for emergency usage, or a few of them. Then you can put the money into CD's and earn interest and still be able to cash them when you need to pay off the credit cards.

No CDs anymore, but I do have $3k sitting in a savings account in reserve untouched for many moons. Like you said above, I just use CC access checks for any purchases and pay off through my monthly pension check. 2% charge, 0% for 15 months is the one I use. In fact I have financed my last few car purchases just with access checks. Cheaper and no paper work.

 

[rodi]

The reserve is money I don't count on when running FireCalc, i-orp, retirement calculations. I should have worded it and question better.

The question might be better asked, when you run retirement calculations do you add all your resources into retirement calculations or keep some reserve and if you keep some reserve, how much?

Pre retirement I took $100k off my firecalc runs just to be cautious... but in reality - I know it's there... it was just a fudge factor.

IMO, not including all your investable financial assets in your calculations is just playing mind games with yourself. But since we all know playing with yourself is completely normal, don't worry about it - you won't go blind.

OK REWahoo - you really need to issue a warning to put the coffee cup down, and swallow your sip of coffee prior to reading..... I have just cleaned coffee off my screen from laughing uncontrollably.

 

[Texas Proud]

"The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category." --- From FDIC website

I was told that this meant with 2 names on the account, we are covered to $500,000 so it should be ok.

Not really.... if you have two names on one account it is only covered to the $250,000... adding names does not change the amount covered...


Now, you can structure different accounts with different names to have greater coverage.... like 2 accounts under a single different name for both....


To be sure, you can put in info here and they will tell you if it is covered....


https://www.fdic.gov/edie/calculator.html

 

[ExFlyBoy5]

I like to keep about 50k in a place where I can get to it within a few days with minimal cost penalties.

In practice it's much higher right now for lack of decent investment alternatives.

This is why I have a 60K HELOC. I can take an advance on it electronically immediately and can withdrawl up to 10K in cash the same day (the other 50K would take a few days to made available as cash, but I can't think of ANY reason I would need 50K in CASH).

As for totally liquid (go to the bank and get cash NOW), I keep that number around 7-10K. I have plenty of CC with large available balances, so getting things done quickly (new roof or now a big tree that is dead and has to be removed) is really never an issue.

Now...if some crazy thing happens like you see in the movies (the government thinks I am a spy and puts a lock down on ALL my accounts), then I might be in trouble. But...hopefully that doesn't happen!

 

[REWahoo]

This is why I have a 60K HELOC. I can take an advance on it electronically immediately and can withdrawl up to 10K in cash the same day (the other 50K would take a few days to made available as cash, but I can't think of ANY reason I would need 50K in CASH).
....
Now...if some crazy thing happens like you see in the movies (the government thinks I am a spy and puts a lock down on ALL my accounts), then I might be in trouble. But...hopefully that doesn't happen!

In 2008 thousands of people didn't have to go to the movies to see it:

When the Bank Freezes Your Line of Credit

Across the U.S., sellers with good credit who have never been late on a mortgage payment are getting their home equity lines of credit (HELOCs) frozen or downgraded. Major lenders like Bank of America, Citibank, Countrywide Financial Corp., Washington Mutual Bank and USAA have announced that they're cutting back HELOCs ...

Bottom line, a HELOC isn't always a reliable source of 'reserve money.'

 

[Major Tom]

I'm a little surprised that no-one (unless I'm missing something) has asked F-One any questions about the level of his income, either in actual dollar terms, or as a percentage of his reserve. For the average retiree in this forum, with a stash of maybe a couple of million, 700K would be considered far too high. For me, it's pretty dang close to my entire stash (though I am a bit of a pauper, in average ER terms).

Perhaps the reason no-one has asked about his annual living expenses is because unless they are over somewhere in the region of a million a year or more, almost everyone would consider a 700K reserve to be too much. I mean, even a gentleman who is at the higher end of the income ranges in this forum can't imagine what he'd need 500K for in a hurry.

So we're either speaking with Mr Trump, Mr Gates, or Mr Branson, or F-One is just incredibly (and I mean incredibly) cautious with his money. Just in case no-one else has asked you, F-One, I'd like to pose the question - what sort of expenses do you have in your life that you'd need to get your hands on half a million or more in a hurry? You can consider this a rhetorical question if you like!

EDIT - in retrospect, I was exaggerating a little for the purposes of effect. If OP has total assets of, say, $10 million, then keeping 700K in reserve might not be considered excessive.

 

[jkern]

We keep a fair amount in cash earning very little but it represents a very small percentage of our invested assets, maybe 2-3%. Not really to cover emergencies, but rather the usual cash flow lumpiness associated with big expenditures or dividend receipts. Our portfolios are in margin accounts and would support very high margin loans if a very big emergency were to arise. Really can't think of an emergency bigger than say $500,000 though? Being Canadian it wouldn't likely be health related. Maybe a ransom demand? But don't travel to risky places.

I live in earthquake country and earthquake insurance is far too expensive. I can see needing to rebuild (about $600k) after a major quake if you are self insured.

 

[kcowan]

Because we have been retired for 14 years, we would rely on portfolio margin because we have no debt. We needed a credit card for an emergency hospital visit last year (infected spider bite). When the insurance kicked in, they wrote us a check to repay it.

 

[ExFlyBoy5]

In 2008 thousands of people didn't have to go to the movies to see it:

When the Bank Freezes Your Line of Credit

Bottom line, a HELOC isn't always a reliable source of 'reserve money.'

I am not under any illusion that the HELOC will be available to me indefinitely. I have funds available, but they are currently working for me, so they are not easily accessible..at least not for about 3 business days.

I am also not too concerned about the HELOC being closed or reduced. I have a balance of ZERO and even if I MAXED it out, it would be less than 25% of the FMV of my house. And it's with PenFed, whom I trust to not close an account much more than I would with a big mega-bank.

 

[dallas27]

I keep my emergency fund in emerging markets. I think the philosophy of putting rainy day funds in safe assets is silly.


Sent from my iPhone using Early Retirement Forum

 

[Bir48die]

So I pay myself a salary every two weeks. Of that I put $600 into a fund of Taxes, Car/Home Insurance, Christmas & Copays. Fund number two is $500 per paycheck for Home & Auto Repairs. Third is $500 for Entertainment/Clothing/Travel. The rest is for everyday bills. Hopefully these all cover yearly and surprise bills. If these are not spent then I'll deposit back to earn interest.

 

[Islandtraveler]

Someone told me that Ally offers a 5 year CD @ 2% with a six month interest forfeiture if broken early. If I wanted to stash a bunch of cash ultra conservatively, that’s what I would do. This way you still remain liquid.

 

[Shanky]

I think the OP does not trust any retirement calculators, formulas and such and is asking how much they should adulterate the formula by to feel safe. Call it a fear factor. As others have indicated, the $700K amount may or may not be reasonable depending on the OP's total assets and how fearful they are.

 

[Texas Proud]

I live in earthquake country and earthquake insurance is far too expensive. I can see needing to rebuild (about $600k) after a major quake if you are self insured.

I cannot see taking a risk of $600K... what kind of premium are you talking about

IIRC, the chance of something major happening to a house is less than 1%... I do not know the chance of a major earthquake.... but I think that if it happened then almost all houses would have damage so I can see why it is so high.... kinda like flood insurance if you live in a flood zone... when it happens, most houses are affected....

 

[fh2000]

We are not retired yet. We keep a mental 10% amount of our portfolio as our reserve. This is for large purchases; 2-3 more cars; new roof; DD's wedding; graduate schools, etc.

The remaining account will give us 25X retirement estimated expenses. We are ready but our jobs are without much pressure, so we keep going for now.

 

[kgtest]

Had family lose their livelyhood and home in Hurricane Katrina. They only had about 100k in retirement and all other accounts. It was enough to get them back on their feet. Sure life might not be the same after one of these "events" but it won't take 700k to recover.

 

[6miths]

I have to admit not reading the entire thread but think I have the gist. I am with the 'nothing in reserve', 'all invested', 'I can always sell something from somewhere' crowd. And I guess if I couldn't sell something - as in the world was ending... then I break into the coin collection.

 

[F-One]

To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets.

I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

 

[mrfeh]

It earns .001% in the cash account.

You are your bank's favorite customer.

 

[Major Tom]

To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets.

I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

Thanks for the response, F-One. If you can afford to keep that much in an account that gives a low return, and it's necessary to do this for you to feel comfortable, then that is all the justification you need, I think.

For me, the key decider is whether your portfolio overall will return enough income for you to live. If it does, your approach sounds fine to me. There's no point in maximizing your long-term return if the result is that your retirement feels like a white-knuckle ride. We all have different tolerances for risk and volatility.