Emergency Fund vs Retirement Contributions Help Needed

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Investing.Newbie
Posts: 83
Joined: Wed Oct 11, 2017 1:23 pm

Emergency Fund vs Retirement Contributions Help Needed

Post by Investing.Newbie »

Hey Guys
I have around 3 months’ worth of emergency funds. I'd like to bump it up to 6 months. Should I stop my 401K & ROTH contributions till I get there?
  • I don't have any employer 401K match.
  • I would have to stop contributing around 5 months with only 401K contributions.
  • With ROTH I should get there around 4 months.
Thanks for all your help!
Newbie
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jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Emergency Fund vs Retirement Contributions Help Needed

Post by jimb_fromATL »

Don't stop 401(k) contributions or contributions to a Roth IRA in order to build up the emergency fund any faster.

A good rule of thumb is to have at least 6 months or more of living expenses (including rent or mortgage payment with taxes and insurance) plus all other payments and expenses.

The reason to put the extra oney in the Roth IRA (for you and your spouse if married) is that you can withdraw your contributions from a Roth IRA at any time without tax or penalty; so it is still available in a dire emergency.

There is a yearly maximum to how much you can contribute to a Roth. So ... IF you were not going to max the Roth IRA space otherwise, then even if you have to take some back out for a bigger emergency later, you have not really lost anything.

But if you don't ever need it for dire emergency after all, then you'll be considerably better off in retirement because you have not lost the once-per-year use-it-or-lose-it opportunity to put the extra money into an account as soon as possible where it can earn compound interest for the rest of your life with no taxes on the earnings.

The main caution is that the funds in the Roth that are earmarked for a potential emergency need to be placed in stable value funds -- perhaps some combination of money market funds, CDs, etc, to preserve the value and insure that it's all there if you need it for an emergency.

Once you have enough saved in your non-retirement emergency fund and enough in your Roth IRA(s) that you would still have enough cash available even if the Roth funds were to drop a lot in value during a market crash, you can afford the risk to move more of the Roth money into more aggressive mutual funds with more stocks in the mix, where it is likely to gain more in value and earn even more compound interest in the long run.


jimb
Last edited by jimb_fromATL on Fri Sep 07, 2018 12:45 pm, edited 1 time in total.
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welderwannabe
Posts: 1220
Joined: Fri Jun 16, 2017 8:32 am

Re: Emergency Fund vs Retirement Contributions Help Needed

Post by welderwannabe »

Investing.Newbie wrote: Fri Sep 07, 2018 11:22 am Hey Guys
I have around 3 months’ worth of emergency funds. I'd like to bump it up to 6 months. Should I stop my 401K & ROTH contributions till I get there?
  • I don't have any employer 401K match.
  • I would have to stop contributing around 5 months with only 401K contributions.
  • With ROTH I should get there around 4 months.
Thanks for all your help!
Newbie
3 months is a solid emergency fund. If you want to build it up, just add to it slowly while funding your retirement.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
MathWizard
Posts: 4650
Joined: Tue Jul 26, 2011 1:35 pm

Re: Emergency Fund vs Retirement Contributions Help Needed

Post by MathWizard »

I agree with jimb_fromATL. At least keep contributing to ROTH.

For the self selected pool of people on this board, few have ever had to use much of the true emergency fund, and of
those fewer still needed more than 3 months worth. By having 3 months EF plus ROTH contributions as the second tier,
you will be covered in the low probability event that you need more than 3 months, and in the much greater probability event that
you just use it for retirement.

Back when polls were allowed, we had:

Code: Select all

https://www.bogleheads.org/forum/viewtopic.php?t=158613
Not scientific, but people on this board are investing for the future, so deferred gratification seems to be
in their genes. This suggests that they have invested in their skills, increasing the likelihood of a steady job.
An emergency that cannot be handled by 3 months expenses generally means job loss.
Chadnudj
Posts: 862
Joined: Tue Oct 29, 2013 11:22 am

Re: Emergency Fund vs Retirement Contributions Help Needed

Post by Chadnudj »

FWIW, if you have a Roth, your contributions (since they can be withdrawn tax free) ARE an additional emergency fund for you. So I'd keep on doing what you're doing -- max out the 401k, max out the Roth, try to build the emergency fund with anything extra/bonuses/tax refunds.
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