Use emergency fund to maintain investments?

[dandinsac]

I am in my mid-50's and was recently notified that my salary will be reduced by 20% due to uncertainty resulting from the pandemic. Others were furloughed, so I am fortunate! I estimate that this will lower my take home pay (after taxes, HSA, insurance, etc) by about $2300/month, before I make any 401K investments.

For the past 10 years, I have been fully investing in my tax advantaged accounts. This year, I am investing in a pretax 401K, 401K catch up, my spouse's pretax IRA, and a Roth IRA. I invest every 2 weeks in the 401K and weekly in the IRAs.

To maintain the level of investments at the current rates, I will have to use $1500-2000/month from my cash emergency fund. (My fund is about $75K, or about 10-12 months). If this is a short-term salary drop, I don't have any reservations. But, with a lengthy downturn, I could get furloughed or even laid off.

My current plan is to maintain my current rate of investments for the next 3 months. If I am still on the salary reduction and I don't have a definitive date of when it will be reversed, then I will stop the IRA investments and lower the 401K to 6% to get the matching.

I'd appreciate your comments on the plan and any suggestions for improvement.

[jjface]

If 20% results in about $28000 after tax drop i imagine you have scope to tighten your belt instead since still making over $100k. I don't know your liabilities or if you are in a hcol area though. But in any case I wouldn't use my emergency fund. Your employer is already making cuts and if things go on longer than expected chances are more are on the way.

[celia]

I wouldn't touch that emergency fund. I would even add to it in times like this.

What if you and your spouse are furloughed (laid off) completely, are in a car accident, and there is an earthquake/ tornado/ hurricane/ virus impact to you this year? You need to be prepared for more than one disaster in a year.

With your pay cut, that is a good reason to temporarily stop contributing to something. You can chose to stop funding the 401K, Roth, spouse's tIRA, or any other benefit (except medical insurance) or out-of-pocket expense. But please don't put yourself in jeopardy by not having enough in your emergency fund.

[dandinsac]

What if you and your spouse are furloughed (laid off) completely, are in a car accident, and there is an earthquake/ tornado/ hurricane/ virus impact to you this year? You need to be prepared for more than one disaster in a year.

If 20% results in about $28000 after tax drop i imagine you have scope to tighten your belt instead since still making over $100k. I don't know your liabilities or if you are in a hcol area though. But in any case I wouldn't use my emergency fund. Your employer is already making cuts and if things go on longer than expected chances are more are on the way.

Thank you for the time to reply. I have something to think about — what do I really know about my company’s financial situation? (not much) What happens if a real emergency happens? (Smaller emergency fund gets drained sooner.)

I will likely just do the 6% 401K to get the match and putting everything else on hold. There is a lot of 2020 left and I can always catch up later IF there are no other setbacks.

Thanks again.

[Grt2bOutdoors]

Absolutely NOT!!! Let’s lay out the facts:
1) Your company is furloughing and laying off staff.
2) Your compensation has just been reduced by 20%.
3) Your employment/employer is on unsteady ground.

For any and all of the above reasons, is sufficient enough to hold on to ALL of your emergency fund and not spend a dime of it to make long term investments.

[chevca]

Others were furloughed, so I am fortunate!

So, you may be next... and you want to start dipping into the emergency fund to fill investment accounts? Uh, no.

This forum can really skew priorities. It's a little worrisome, really. Filling the 401k is not the most important thing in life. Not that folks shouldn't do it or try to do it, but sometimes it might not happen. Keep perspective.

[Peculiar_Investor]

I wouldn't touch that emergency fund. I would even add to it in times like this.

Definitely wouldn't be touching it. Has the OP read through this stickied topic, Deploying your emergency fund to buy stocks? Think again.?

[yangtui]

I do not consider investing to be an emergency so I wouldn't dip into my emergency fund.

[Coltrane75]

I am in my mid-50's and was recently notified that my salary will be reduced by 20% due to uncertainty resulting from the pandemic. Others were furloughed, so I am fortunate! I estimate that this will lower my take home pay (after taxes, HSA, insurance, etc) by about $2300/month, before I make any 401K investments.

For the past 10 years, I have been fully investing in my tax advantaged accounts. This year, I am investing in a pretax 401K, 401K catch up, my spouse's pretax IRA, and a Roth IRA. I invest every 2 weeks in the 401K and weekly in the IRAs.

To maintain the level of investments at the current rates, I will have to use $1500-2000/month from my cash emergency fund. (My fund is about $75K, or about 10-12 months). If this is a short-term salary drop, I don't have any reservations. But, with a lengthy downturn, I could get furloughed or even laid off.

My current plan is to maintain my current rate of investments for the next 3 months. If I am still on the salary reduction and I don't have a definitive date of when it will be reversed, then I will stop the IRA investments and lower the 401K to 6% to get the matching.

I'd appreciate your comments on the plan and any suggestions for improvement.

I would cut reallocate the savings budget from 401k, IRA, etc., towards building up the emergency fund to a higher level.

If things turn out better than expected; you can then reallocate part of the emergency fund back to opportunistic investments. If things turn out worse than expected, you have a bigger fund.

[rbaldini]

I don't think "not being able to max out retirement accounts" counts as an emergency.

[celia]

OP, we had a 12-month period where DH and I were both out of work, during a period of high layoffs in the 1990s. We had a mortgage and kids in faith-based private schools (tuition). Yes, finances were tight for a year as we cut out all excess spending (tuition was not cut as that supported our values). Between one severance package and two unemployment checks, we managed to make it. Obviously there were no retirement or IRA contributions during that period. We also had other years where we couldn’t contribute. It wasn’t the end of the world.

We were able to retire when we did, mainly because our living expenses went down. After the mortgage was paid, the schooling was paid for the kids, and we felt we had “enough” in retirement accounts, we retired. (Contributing to retirement accounts was also one less “expense”.) Our living expenses are now less than half of what they once were. We didn’t have huge tIRAs like many Bogleheads since we mostly contributed to Roths instead of taking the tIRA contribution deductions. But we haven’t touched the Roths at all. They are our new “emergency fund”.

[dandinsac]

Thanks all for your input. I’ve decided to “invest” only enough in the 401K to get the 50% match. That’s an easy decision for me. All the other IRA and 401K investments will stop since I can catch up later in 2020 if this gets resolved. We’ll still be a bit worse off, by about $300/month. Most of this will be made up with cost cuts and, I’ll supplement with a little cash from my emergency fund. In a worse case scenario, if I lose my job, I have enough in my Roth IRA and an older 401K that I can tap to replenish my cash on hand.

[ColoRetiredGirl]

Thanks all for your input. I’ve decided to “invest” only enough in the 401K to get the 50% match. That’s an easy decision for me. All the other IRA and 401K investments will stop since I can catch up later in 2020 if this gets resolved. We’ll still be a bit worse off, by about $300/month. Most of this will be made up with cost cuts and, I’ll supplement with a little cash from my emergency fund. In a worse case scenario, if I lose my job, I have enough in my Roth IRA and an older 401K that I can tap to replenish my cash on hand.

OP you have received some good advice. My 2 cents is before reducing your retirement savings try looking at your budget and see if you can eliminate discretionary expenses or put some on pause. I use You Need A Budget (YNAB) and it helped me identify unnecessary expenses.

[cheese_breath]

If anything, I'd be adding to your emergency fund while you still can. Given the times as they are you might need a larger E fund than previously thought.

[carminered2019]

OP, do you have bonds in your retirement account and if yes then take risk by going 100% equities instead of using EF to invest.

[dandinsac]

OP, do you have bonds in your retirement account and if yes then take risk by going 100% equities instead of using EF to invest.

Yes I do. That's a interesting approach that accomplishes much of what I was originally considering... How to buy more stocks to rebalance stock/bonds in the short term. Thanks for the post.

[Nate79]

You could fully fund the Roth IRA right now and put the money in something that is safe like CD's or bond fund. That's a minor detail but could still be used as a secondary emergency fund.