Is a large emergency fund needed after 59 1/2

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David Jay
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Is a large emergency fund needed after 59 1/2

Post by David Jay »

I have been running with a too-small emergency fund for many years. I have been throwing extra cash into my ROTH. I know the emergency fund is too small, over the last 18 months have started growing the emergency fund. But I still only have about 3 months expenses in cash outside of retirement accounts.

In addition to our ROTH accounts, I will have a big tIRA when I roll over my 401K (my plan allows an in-service distribution @ 59 1/2). Do I need a separate 6-12 months of emergency fund outside of my retirement accounts which I will be able to access penalty-free? At least in theory, I could take up to $13,000 (6500 + 6500) out of my ROTH and return it the same year if I really needed to access cash. And I have a $25,000 (zero-balance, of course) home equity line-of-credit which I use for short term cash(for instance, I got a great deal on an RV in the winter so I bought it, waited till spring to get maximum value from the old RV).

BTW, I am nearing my number, but we need to get the house paid off before retiring. So extra cash is now being directed to paying down the mortgage. I will not be making contributions to the ROTH over the next 2-3 years, account growth should get me to my number before I can zero-out the mortgage.
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victork
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Re: Is a large emergency fund needed after 59 1/2

Post by victork »

I think that there are two areas to consider.
One is loss of income.
Two is unexpected expenditures.
Usually, an emergency fund is there in case one loses a job, and needs income while searching for another.
Also, consider that you may need a new roof and furnace for your house, just when the transmission on your RV fails.
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Re: Is a large emergency fund needed after 59 1/2

Post by dbnarley »

That is a very good question. I have been wondering that myself lately. I am 62.
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Re: Is a large emergency fund needed after 59 1/2

Post by abuss368 »

I still follow the old saying: " cash is king"!
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David Jay
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Re: Is a large emergency fund needed after 59 1/2

Post by David Jay »

To respond to Victor's point, I can get my hands on $40,000 on any business day. Then if I have to I can sell something in my ROTH and get more. So do I need to have $40,000 laying around in cash (BTW - I am turning 59 1/2 within months).
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Re: Is a large emergency fund needed after 59 1/2

Post by Sidney »

I retired at 55 and completely eliminated my emergency fund. My whole portfolio is my emergency fund.
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Re: Is a large emergency fund needed after 59 1/2

Post by bertilak »

Sidney wrote:I retired at 55 and completely eliminated my emergency fund. My whole portfolio is my emergency fund.
I am in a similar situation but the taxable account in my portfolio includes a cash position. I think of that as a combination emergency fund and "dry powder." I should have used past tense because since last fall I had some big unexpected expenses that ate up most of that dry powder.

I don't plan on replenishing it by selling anything this year, but I will leave NEXT year's RMD as cash and that will get me back close to where I was. I might take the RMD early because of this.

I guess that means that my idea of an emergency fund is pretty flexible. I think this is a reasonable position because I need almost nothing from my investments for normal (non emergency) expenses.
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Re: Is a large emergency fund needed after 59 1/2

Post by Stonebr »

Retired and drawing down taxable, we are deferring SS to 70. In the meantime, the drawdown means holding substantial cash -- online savings and a CD. Note that this cash/CD is counted as part of the fixed income allocation. I'm just not taking risk with it, and the taxable return of about 1% is dismal.

I'm not sure the concept of emergency fund even exists for a retiree. Isn't that what the whole portfolio and annuity income thing is about? Meeting all the financial needs of a retired couple -- including emergencies?
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Re: Is a large emergency fund needed after 59 1/2

Post by bertilak »

Stonebr wrote:Retired and drawing down taxable, we are deferring SS to 70. In the meantime, the drawdown means holding substantial cash -- online savings and a CD. Note that this cash/CD is counted as part of the fixed income allocation. I'm just not taking risk with it, and the taxable return of about 1% is dismal.

I'm not sure the concept of emergency fund even exists for a retiree. Isn't that what the whole portfolio and annuity income thing is about? Meeting all the financial needs of a retired couple -- including emergencies?
I think the idea of "emergency" includes "unexpected" so things like annuities with regular income don't work well for irregular expenses. A pile of cash can handle that and then be replenished over time. The EF is like a shock absorber. It buffers the bumps in the road.

If your portfolio is large enough you can convert pieces of it to emergency cash as needed. "Large enough" means that you can, and are willing to, do so even in a down market.
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Re: Is a large emergency fund needed after 59 1/2

Post by john94549 »

My wife and I are both 68. I'm retired; she is not (her choice, as she loves her job). We have a "cash stash", but don't really consider it an "emergency fund". It's money we can tap without tax consequences or guilt, and depends not on the ups-and-downs of stock or bond funds. Good old garden-variety after-tax cash in savings and CDs. All FDIC/NCUA-insured.

To the precise question of "how large is large enough", it depends on your lifestyle, your expected (and unexpected) expenses, and your comfort level. We have 20% (+/-) of our investable assets in our after-tax cash stash, and another 40% (+/-) in tax-deferred IRA CDs, but that might be a bit too conservative for many. Our IRA/401k "balanced funds" (the remaining 40%) are for the "long haul". Our allocation there is roughly 60/40. We don't plan to touch those balanced funds until age 85 or thereabouts, should we live that long.

For those over 59 1/2, IRA CDs at StateFarmBank and PenFed* might be worth a peek. Both waive EWPs for partial withdrawals on IRA CDs for those over 59 1/2. You have to pay your taxes, however.

*The 5-yr at SFB probably is the optimal for folks contemplating partial early withdrawals, but rates do jump around.
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Re: Is a large emergency fund needed after 59 1/2

Post by Kevin M »

I have never thought in terms of having an emergency fund, but I always have considered liquidity to meet expenses. I happen to have a large taxable account, and if I need to raise cash, I just pull from whatever asset is over its target value according to my asset allocation (I am early 60's and retired).

Since you can access your retirement accounts penalty-free, and your Roth tax-free, I see no reason to forego paying down the mortgage and/or adding to your retirement accounts in lieu of building up an emergency fund. In other words, you already have the required liquidity, so you might as well optimize what you do with your income in terms of after-tax risk/return trade-offs.

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Re: Is a large emergency fund needed after 59 1/2

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David Jay
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Re: Is a large emergency fund needed after 59 1/2

Post by David Jay »

Thanks for all the input. I have spent the last 30+ years thinking about my 401K/tIRA/ROTH as "untouchable". I am going through the process of thinking through the implications of that changing status.

And yes, I am still working, likely until 63-65 (still have a substantial balance on my mortgage!).
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Re: Is a large emergency fund needed after 59 1/2

Post by whaleknives »

David Jay wrote:Thanks for all the input. I have spent the last 30+ years thinking about my 401K/tIRA/ROTH as "untouchable". I am going through the process of thinking through the implications of that changing status.

And yes, I am still working, likely until 63-65 (still have a substantial balance on my mortgage!).
Yes, as I told a coworker before retirement, it's time to stop saving and start spending.
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Re: Is a large emergency fund needed after 59 1/2

Post by gwrvmd »

I think most people would think favorably about a Emergency Fund until you (or both of you) are 65 and eligible for Medicare.........Gordon
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Re: Is a large emergency fund needed after 59 1/2

Post by Dandy »

During the accumulation phase an emergency fund is mostly for loss of job/income. Most other "emergencies" such as a new roof or car can be handled by a car loan/credit card/HELOC.

Retirees usually have the non loss of income emergencies and can usually handle them in the same way. But, they may have some health related expenses that might create a bit more than getting a new roof. Usually, an allocation that is a bit more fixed income oriented should help address many added sudden expenses. If possible your "number" should include some money for a retiree emergency fund.
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Re: Is a large emergency fund needed after 59 1/2

Post by David Jay »

I'm thinking about a "bucket" approach with a year's expenses in cash, even inside the retirement accounts.

I should be 100% ROTH and tIRA until 70 1/2, when I have to start RMDs and I will acquire some taxable assets.
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Re: Is a large emergency fund needed after 59 1/2

Post by cherijoh »

bertilak wrote:
Stonebr wrote:Retired and drawing down taxable, we are deferring SS to 70. In the meantime, the drawdown means holding substantial cash -- online savings and a CD. Note that this cash/CD is counted as part of the fixed income allocation. I'm just not taking risk with it, and the taxable return of about 1% is dismal.

I'm not sure the concept of emergency fund even exists for a retiree. Isn't that what the whole portfolio and annuity income thing is about? Meeting all the financial needs of a retired couple -- including emergencies?
I think the idea of "emergency" includes "unexpected" so things like annuities with regular income don't work well for irregular expenses. A pile of cash can handle that and then be replenished over time. The EF is like a shock absorber. It buffers the bumps in the road.

If your portfolio is large enough you can convert pieces of it to emergency cash as needed. "Large enough" means that you can, and are willing to, do so even in a down market.
+1 I don't necessarily think retirees need an emergency fund per se, but they should have access to some funds that are outside of IRAs/401K that are in cash equivalents or short-term bonds so that an unexpected expense coupled with a downturn in the stock market doesn't require them to cash in their portfolio at just the wrong time. Bertilak is on the money when he mentions it acting as a "shock absorber".

Using your Roth IRA as a substitute emergency fund makes sense if you are just starting out and have to decide between an emergency fund or a Roth contribution. Doing so as you approach retirement is more problematical. Not all emergencies are of a short-term nature, especially as we age and have health crises. OP also seems to be counting on the ability to borrow from ROTH and return it the same year, but then mentions no longer making Roth contributions. He/she would then be limited to taking out money as a rollover and putting it back in within 60 days. Recent regulations limit you to one rollover (per person) per year irrespective of how many accounts you have.

IMO, the OP should grow the emergency fund a bit more before aggressively paying down the mortgage. It sounds like the OP isn't quite as close to his/her number as he/she thinks.
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Re: Is a large emergency fund needed after 59 1/2

Post by cherijoh »

john94549 wrote:My wife and I are both 68. I'm retired; she is not (her choice, as she loves her job). We have a "cash stash", but don't really consider it an "emergency fund". It's money we can tap without tax consequences or guilt, and depends not on the ups-and-downs of stock or bond funds. Good old garden-variety after-tax cash in savings and CDs. All FDIC/NCUA-insured.

To the precise question of "how large is large enough", it depends on your lifestyle, your expected (and unexpected) expenses, and your comfort level. We have 20% (+/-) of our investable assets in our after-tax cash stash, and another 40% (+/-) in tax-deferred IRA CDs, but that might be a bit too conservative for many. Our IRA/401k "balanced funds" (the remaining 40%) are for the "long haul". Our allocation there is roughly 60/40. We don't plan to touch those balanced funds until age 85 or thereabouts, should we live that long.

For those over 59 1/2, IRA CDs at StateFarmBank and PenFed* might be worth a peek. Both waive EWPs for partial withdrawals on IRA CDs for those over 59 1/2. You have to pay your taxes, however.

*The 5-yr at SFB probably is the optimal for folks contemplating partial early withdrawals, but rates do jump around.
John - that is extremely conservative. You have 60% cash equivalents, 24% stock, 16% bonds across your entire portfolio if I am reading your post correctly. You have minimized your volatility risk, but what about inflation risk?
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Re: Is a large emergency fund needed after 59 1/2

Post by magneto »

bertilak wrote: I am in a similar situation but the taxable account in my portfolio includes a cash position. I think of that as a combination emergency fund and "dry powder." I should have used past tense because since last fall I had some big unexpected expenses that ate up most of that dry powder.
I guess that means that my idea of an emergency fund is pretty flexible. I think this is a reasonable position because I need almost nothing from my investments for normal (non emergency) expenses.
Yes very much with Bertilak on this one.

We hold cash as an asset class at all times. More questionable; we vary the cash% of portfolio dependent on valuations being offered by the competing asset classes.
To take an extreme, if bonds were yielding 10% and stocks 6%, then less cash would be held than is held today. The investor needs to keep a close watch on projected inflation for cash (and for that matter with nominal bonds).

To also state the blindingly obvious; bonds and stocks are both liquid so cash can be realised at any time.
Not so of course with real estate or fixed term bonds with lock-ins.

We are in mid-retirement.

Good Luck
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Re: Is a large emergency fund needed after 59 1/2

Post by john94549 »

cherijoh wrote: You have minimized your volatility risk, but what about inflation risk?
Our after-tax "stash" currently bests inflation by a wide margin (even after taxes) due to a fortunate purchase of a seven-year 3.8% CD from USAA in 2010 (two more years to run). Our laddered IRA CDs also have a real return, albeit somewhat less.*

We took Wm. Bernstein's sage advice to heart: "once you've won the game" and all that. We have enough in our IRA CDs to cover age 70 - 85, and enough in after-tax to allow splurges and such. The kids get the real property (principal residence and Maui condo, presumably with a step-up in basis and no tax); we plan to spend all else, should we live that long.

The kids are doing quite fine. One is a principal/director at an investment bank, the other a techie (as is her husband). Neither seems to be counting on an inheritance. Should "truth be told", each would probably be shamed as being in the "1%".

*Wild swings, due to this rate environment, but generally over inflation. The worst, in my IRA CDs, was Alliant's 1.7%, which is still at or above inflation. Still irked me when, a year or so later, the same IRA CD was at 2.1%. Bought the 2.1% with after-tax.
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Re: Is a large emergency fund needed after 59 1/2

Post by magneto »

Just to add to the above when considering cash versus bonds, saw this today :-

http://www.trustnet.com/News/613577/bur ... r-as-ever/

The author is as uncertain as are all the rest of us, but IMHO the bond market is an accident waiting to happen, but have no idea how or when.
In retirement ultra-caution is needed with the sequence of returns risk, so some cash is prudent. The question is how much?

All Best
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Re: Is a large emergency fund needed after 59 1/2

Post by BigJohn »

I'm retired and keep about 6 months of cash in a linked checking/savings account. I consider this my emergency fund but may have a slightly different definition of what contingency it is there to protect against. Agree with comments above that after retirement your portfolio is your emergency fund to cover unexpected expenses. The contingency I keep this cash to protect against is the "I get hit by a bus" contingency. All our bills are on auto-pay from these accounts so should I die or become incapacitated, everything is taken care of for ~6 months. This gives my kids some time to become involved in my finances and get things back under control for their mother.
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Re: Is a large emergency fund needed after 59 1/2

Post by Ron »

If you're still working at age 59.5, then yes - you need an emergency fund. That fund is there to cover your income needs if you lose your job. It's the same as any other age in which you are still counting on your job to cover your expenses.

If retired, you should have a "bucket" of cash equivalents to fund your current retirement expenses without having to sell in a down market. The size of that bucket is up to you (I/wife have 3-4 years in cash) although the amount of cash held has been going down due to retirement income stream "starts" such as pensions at age 65, SS at age 70.

Our respective cash buckets cover the times (infrequently) that a true "emergency" crops up.

FWIW,

- Ron
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Re: Is a large emergency fund needed after 59 1/2

Post by ruralavalon »

Age 70, retired 4 years, the entire portfolio is am emergency fund. We don't keep a cash hoard anywhere, just 1-6 months expenses in a checking account and whatever stock dividend has recently been paid in our joint taxable account. All bills are set up on auto pay.

For 15+ years before retirement we had a large joint taxable account invested in stock index funds, which could be drawn on for emergencies. We also had (still have) a very high limit credit card (could cover almost a year of of living expenses) which we didn't use. We didn't keep a cash hoard anywhere during that time. Any money not needed for living expenses was always immediately invested.

I suppose my motto is "stay invested", am I too dumb to be scared?.
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Re: Is a large emergency fund needed after 59 1/2

Post by larmewar »

Depending on the situation, a small emergency fund may be adequate. I'm reducing the size of my emergency fund; cashing I-bonds with proceeds going towards paying off mortgage. I have a military pension though, so your situation is likely different than mine.

Lar
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