Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Does size and role of emergency fund change in ER?
Old 03-08-2014, 08:59 PM   #1
Recycles dryer sheets
Rothman's Avatar
 
Join Date: Apr 2013
Posts: 252
Does size and role of emergency fund change in ER?

So I've always had an emergency fund and in my mind the reason for the fund was primarily in case I ever lost my job. The fund has also been used for household emergencies but luckily they have really been small dollar and fund replenished quickly. The fund is $100k and represents my expenses for about 2 years on my requirements only level. So my question is in ER my old primary reason is gone, it seems like I can probably reduce the size of the fund and put half of it, $50k, into my investment fund. The remaining $50k emergency fund is then just for house or car surprises so I don't have to liquidate investments at a bad time. Am I thinking right? Also I've not been counting the emergency fund in my fund for SWR, is that usual?
Rothman is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-08-2014, 10:37 PM   #2
Thinks s/he gets paid by the post
Ready's Avatar
 
Join Date: Mar 2013
Location: Southern California
Posts: 3,995
I see no reason not to include your "emergency fund" in your SWR. Cash is cash no matter which bucket you put it in.

As for your primary question, you have to consider what portion of your investments is in fixed income, and what type of investments you have there. I keep half of my fixed income in 5 year CDs earning 3% or more. Most of my CDs only have a 60 day penalty for early withdrawal, so I see no reason not to consider that a source for "emergency funds".

If you have money in short term bonds or bond funds, I would look at that the same. They are highly liquid and relatively low volatility.

And as you stated in your first sentence, an emergency fund refers to cash you will have to pay your bills if you lose your job. So if you're retired, it really would not be looked at as emergency funds. It's simply the money you keep liquid so that if we have a market crash you are not selling investments at a bottom to pay for bills.
Ready is offline   Reply With Quote
Old 03-09-2014, 07:56 AM   #3
Recycles dryer sheets
Rothman's Avatar
 
Join Date: Apr 2013
Posts: 252
Thanks Ready, I did go to PenFed CD last year for remainder of my fund since regular savings rates went near 0%. I do have more than my emergency fund in cash in my taxable account, so it seems you'd consider that enough in retirement since job loss is no longer relevant. Treating that as part of SWR fund would put me $100k closer to my goal so I am interested to see others agree.
Rothman is offline   Reply With Quote
Old 03-09-2014, 09:19 AM   #4
Thinks s/he gets paid by the post
growing_older's Avatar
 
Join Date: Jun 2007
Posts: 2,657
I do think the purpose of the Emergency Fund changes and with that change the size should also be up for reconsideration. When working my EF was intended to protect me from a loss of income during a possibly extended job search. That was by far the largest emergency and strongly influenced the total amount needed. An unexpected car repair or new furnace could easily be accommodated with either cash flow or a credit card, and that's pretty much what happened for the last 20 years. I haven't made any withdrawals from the emergency fund - even during job searches I was able to skate by on severance and unemployment. Now that I am close to FI, I think that if I lost my job I might just say "close enough" and ER. So holding the EF in cash for a protracted job search no longer makes sense.

I've always been a fan of a tiered Emergency Fund, with part in cash and part in investments. I just made sure it's so big that even if the investments are down, even way down, that there would still be enough to see me though the possible emergency. As a result, the EF has now grown to several times it's actual intended size, so I just sweep the excess into investment portfolio. This close to FI, I think I might as well sweep the rest of it into investments as well. There is a cash component in the investments that's more than enough to carry me though a new furnace or unexpected car replacement. I think it's no longer necessary to keep a separate "fund" for emergencies, especially since job loss would no longer be a problem, but more like an opportunity to ER.
growing_older is offline   Reply With Quote
Old 03-09-2014, 09:40 AM   #5
Thinks s/he gets paid by the post
jfn111's Avatar
 
Join Date: Jan 2014
Location: Bloomington, MN
Posts: 1,137
Since we retired I look at the cash sitting in my Investment or Retirement accounts as my emergency fund. I have easy access to the money, usually 48 hours to transfer.
We keep about $18-20 grand in the checking account and we can do an on-line transfer from our HELOC, which I have done a couple of times to cover the check written for a new car or motorcycle. I pay the HELOC off within 2-3 days and the interest is minimal.
jfn111 is offline   Reply With Quote
Old 03-09-2014, 10:23 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2009
Posts: 6,682
I have a tiered approach to emergency funds. My first tier is the surplus or cushion of cash I keep in my local bank's checking account, about $750, over and above what I need to keep in there to avoid account fees. This covers me for the smaller, unforeseen expenses which can arise in a given month. This happens fairly often.

After that, I keep about $40k in an intermediate-term muni bond fund. It is part of my overall investment portfolio. This account also has checkwriting privileges which provides me with added liquidity beyond having to transfer money from there into my local bank's checking account. Years ago, when I was still working and in a higher tax bracket, I kept more money in this account because its after-tax return was higher. I use this account to cover larger, unforeseen expenses the local bank's checking account surplus cannot cover.

I hate the idea of having a large blob of money in an account or fund which generates very little or no return. I would rather take some small risk to principal and get 2% or 3% return, and mostly tax-free, which is what the muni bond fund gives me.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Old 03-09-2014, 06:03 PM   #7
Recycles dryer sheets
Rothman's Avatar
 
Join Date: Apr 2013
Posts: 252
Thanks growing older, I am thinking the same way in terms of being close enough if a job loss happened in next few years. Regarding the tiered concept, I don't really understand how investing with EF money is different than investing just like the rest of the portfolio, unless I misunderstand and what you are in is stable and liquid like CDs where you can break the term at any time with defined minimal penalty.
Rothman is offline   Reply With Quote
Old 03-10-2014, 10:38 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Apr 2005
Location: Midwest
Posts: 2,962
Before I retired all my money was called "Emergency Fund". After retirement the big money is "retirement money" or "private pension". The emergency fund is not included in that because if I have to throw for something big and unexpected I don't want the sudden drawdown to upset my long-term withdrawal math. At this time I am considering reducing the size of it though.
razztazz is online now   Reply With Quote
Old 03-10-2014, 10:56 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,151
Quote:
Originally Posted by Rothman View Post
The remaining $50k emergency fund is then just for house or car surprises so I don't have to liquidate investments at a bad time. Am I thinking right?
My own opinion is that retired people keep too much of their FIRE portfolios in cash for "emergencies" so they don't have to "liquidate investments at a bad time."

1. The odds of needing to liquidate a big chunk of your FIRE portfolio for an emergency are fairly low.

2. The penalty for liquidating some investments at a bad time is likely exaggerated in the minds of most folks. Unless your portfolio is non-diversified (say one of our comrades who likes to go 100% equity) it would be pretty rare to not be able to comb through things and find some candidates not too painful to sell at any given time.

3. The opportunity cost of holding a ton of cash (not as a reserve for opportunity buying but as a substantial long term emergency fund) is higher than most folks think.

I use no seperate buckets or accounts to hold "emergency" funds. Pretty much everything is in my FIRE brokerage account. I'm fairly active in managing this account and at any given moment if you asked me how I'd come up with, say, $100k for an emergency, I could tell you without booting up the computer.

My biggest concern would be if I was incapacitated, couldn't even whisper in her ear, and DW needed a mountain of cash very quickly. That might result in a non-optimum financial outcome, at least for a few days until my son could become involved.

Note: I'm talking about emergencies, not needing a few thousand bux for a unexpected major auto repair or similar.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Apparently size does matter eytonxav Other topics 42 08-15-2013 04:02 PM
Better place for emergency fund/primary residence down payment fund? nico08 FIRE and Money 7 02-23-2011 04:35 PM
It's best to fund an IRA or emergency fund account? Nanita8140 FIRE and Money 9 08-08-2008 08:43 AM
Annuities and their role in our investing plan cute fuzzy bunny FIRE and Money 158 02-02-2007 05:24 PM
Duration of retirement and size of retirement fund Cool Dood FIRE and Money 9 06-28-2006 08:34 AM

» Quick Links

 
All times are GMT -6. The time now is 01:48 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.