Does size and role of emergency fund change in ER?


Recycles dryer sheets
Apr 30, 2013
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?
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.
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.
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.
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.
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.
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.
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.
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.
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