Whoops - Emergency Fund Way Too Big

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Topic Author
rph12
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Joined: Thu Nov 17, 2011 8:26 am

Whoops - Emergency Fund Way Too Big

Post by rph12 »

Due to job uncertainty, my wife and I swept all extra cash flow to a ladder of 1-6 month T Bills and money market funds for the past few years. My worries about losing my job have subsided, and now we're trying to decide what to do with this outsized emergency fund.

Currently, we have about 16 months worth and I want to trim it back to 6 months and put the surplus into something a little further out on the risk curve, while also not going all the way into a Target Date Fund.

Thoughts on something like this?
6 months remain in rolling 1 month T Bills and money market fund
3 months in a gold ETF
7 months in a Target Date Fund that matches age 65 for us

I also like that I Bonds have a fixed rate of 1.30%, so I'm willing to also max those out for 2024 and maybe overfund my tax return as well.

Rationale for gold: it used to track pretty closely with long term treasuries, but there's a pretty clear divergence now over the past few years. I've never held a gold ETF, but I like that it might hold up well if inflation spikes again. I think I'd rather diversify into gold rather than going further out on the yield curve with Treasuries.

Rationale for Target Date Fund: I think it's highly unlikely I'll ever need to go beyond 6 months in the event of a job loss for either of us.

Thanks!
FIdreams
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Re: Whoops - Emergency Fund Way Too Big

Post by FIdreams »

I definitely recommend you do NOT use a Target Date fund in your taxable account. These funds have a yucky tendency to pass on capital gains and can send unexpected and unpleasant tax bills your way. Only use TDF’s in tax protected accounts.

You also need to be really careful about holding commodity ETF’s, eg for gold, as you can also get hit with taxes even if you didn’t sell anything from the fund.

Instead of a TDF I would use a broad index market ETF like VTI.

But you don’t have to take my word for it!

https://www.morningstar.com/stocks/less ... s-surprise

https://www.morningstar.com/personal-fi ... le-account

https://www.fidelity.com/learning-cente ... odity-etfs
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greenrebellion
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Re: Whoops - Emergency Fund Way Too Big

Post by greenrebellion »

I believe gold is taxed at ordinary income rates and not capital gains so keep that in mind.
- greenrebellion
rockstar
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Re: Whoops - Emergency Fund Way Too Big

Post by rockstar »

My emergency fund is 2x expenses with 1x in I Bonds and the rest in t bills and TIPS that mature in a year or less bought on the secondary market. I don’t think your emergency fund is too big since you can still get a real return pretax on cash like investments.

I’d worry about it more if it was returning a negative real. And that can happen in the future, so buying up I bonds makes sense.

Do you have a longer duration bond portfolio on top of your emergency fund? Or are you strictly cash like and equities?

Gold has been rallying lately. But it can also be negative real for prolonged periods of time too. It’s a long term hold with no cash flow.
lakpr
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Re: Whoops - Emergency Fund Way Too Big

Post by lakpr »

I would use the gift-box technique for the excess emergency funds, buying up "gifts" for each other for future years. This will lock in the 1.3% fixed rate (it's been the highest fixed rate in the past 15 years, and TIPSWATCH site suspects it will go down to 1.2% in another month), while fulfilling the role of "fixed income" in the portfolio. You can offset the investment in a bond fund elsewhere in the portfolio to equities.
Topic Author
rph12
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Re: Whoops - Emergency Fund Way Too Big

Post by rph12 »

Great call outs regarding Target Date and commodities in taxable accounts - I think I would buy something like VTI and hide the gold ETF inside one of my IRA accounts and swap if needed.

My overall retirement portfolio construction is pretty vanilla:
In my retirement accounts I hold target date funds that match closest to the year my wife and I will turn 65

No debt except for our mortgage - cars were bought with cash and credit cards are paid in full every month.

I also hold some Bitcoin, but I do not want the thread to get locked so please do not comment on it :happy

I will research the gift-box technique, I wasn't aware there was a way to purchase for future years. Even if I cannot purchase for the future, I could buy $10,000 for myself and my wife, we gift each other $10,000 and we can each gift $10,000 to our 2 kids? That would be $80,000 locked up for a year, but you are right that I keep looking at that 1.3% fixed rate and it seems very attractive.
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TimeIsYourFriend
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Re: Whoops - Emergency Fund Way Too Big

Post by TimeIsYourFriend »

Gold for emergency fund doesn't make sense. It is more volatile than stocks and can have the same kind of drawdowns. If >6 months is unlikely then maybe you just invest the rest of it as normal. You can always sell taxable stuff if you absolutely need to and if you have short/intermediate bonds in taxable they aren't going to get 50% slaughtered like gold or stocks so they can be your back-up.
"Time is your friend; impulse is your enemy." - John C. Bogle
lakpr
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Re: Whoops - Emergency Fund Way Too Big

Post by lakpr »

rph12 wrote: Tue Apr 02, 2024 12:00 pm I will research the gift-box technique, I wasn't aware there was a way to purchase for future years. Even if I cannot purchase for the future, I could buy $10,000 for myself and my wife, we gift each other $10,000 and we can each gift $10,000 to our 2 kids? That would be $80,000 locked up for a year, but you are right that I keep looking at that 1.3% fixed rate and it seems very attractive.
You buy $10k for yourself for 2024
Your spouse buys $10k for herself in 2024

You buy $10k as a gift for your wife (go through the "Gift Box" menu in Treasury Direct)
Your spouse buys $10k as a gift for you (ditto, go through Gift Box)

You deliver this $10k to your spouse in January 2025 (wait for calendar year change; there are options in the Gift Box menu)
Your spouse does the same

The only caveat here is that, in 2025, you cannot buy any more I-bonds for yourself (the gift your spouse gave you exhausted that $10k limit of 2025). Ditto for your spouse; your gift exhausted her annual allotment in 2025.

You can buy $50k in I-bonds for your spouse, and deliver them to her in 2025, 2026, ....
Or $70k. Or $80k.
Ditto for your spouse.

The catch is that the money is locked up for redemption until it is actually delivered to the gift recipient; and you cannot deliver to a gift recipient more than $10k per year; and you also need to be very much aware if that gift recipient is buying I-bonds for self in that particular year. If the recipient buys $10k for self in an year, and you deliver another $10k as gift to that recipient in the same year, BOTH will get a rather stern letter from the IRS / Treasury Direct.

Edited to add: Sure, you can buy $10k in each of your kid's names, per year. However, Treasury Direct requires separate login(s) for your kid(s), and will not allow redemption of those I bonds except for the kid's benefit. This is NOT YOUR MONEY ANY MORE!
bonesly
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Re: Whoops - Emergency Fund Way Too Big

Post by bonesly »

rph12 wrote: Tue Apr 02, 2024 10:36 am Rationale for gold: it used to track pretty closely with long term treasuries, but there's a pretty clear divergence now over the past few years. I've never held a gold ETF, but I like that it might hold up well if inflation spikes again. I think I'd rather diversify into gold rather than going further out on the yield curve with Treasuries.
This certainly doesn't seem like "tracking pretty closely", but perhaps it does over a shorter (and specific) timer period?
Image

Gold, and other precious metals, to me has always been a speculative hedge against unexpected (and sharp) changes in inflation/interest rates.

The Portfolio Visualizer Correlation Matrix since 2008 shows a correlation coefficient between IEF (7-10y T-Notes) and GLD (gold) of 0.37, which is pretty low for a close-tracking pair (should be much closer to 1.00).

Gold is uncorrelated with stocks (and closer to uncorrelated than positively correlated with bonds), so you can use it as a diversifier, but don't expect a pay-off unless there's a high spike in inflation (which historically doesn't happen that often). As a specialty investment it should be <10% of overall portfolio, so 3-months of your EF seems fine.
Oddball
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Re: Whoops - Emergency Fund Way Too Big

Post by Oddball »

Maybe use some of the money on an "emergency" vacation. :)
jfave33
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Re: Whoops - Emergency Fund Way Too Big

Post by jfave33 »

Typical wisdom says move the excess to your main portfolio and invest per your AA.

If that makes you uncomfortable then your new emergency fund is too small. Maybe 9 months or a year would be better.
Topic Author
rph12
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Re: Whoops - Emergency Fund Way Too Big

Post by rph12 »

I think what I meant was in the time frame when I've been able to invest most heavily in retirement accounts, TLT and GLD seemed to move with each other in the zero interest rate environment, but then diverged in the past 4 years. Could it be a blip that will go away if rates do not go back towards zero and this is the new normal moving forward? Perhaps. I'm somewhat new to paying attention to charts, since I'm pretty vanilla with my retirement accounts.

Image
starfury
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Re: Whoops - Emergency Fund Way Too Big

Post by starfury »

For an emergency fund, I would want it to be safe, simple, and conservative. I definitely wouldn't make decisions based on technical charts. If I were looking to put together an emergency fund now, I would shoot for ~6 months of expenses in a treasury MM fund, and ~1 year in I-Bonds, at least to start with. If you and your spouse can utilize the I-Bond gifting strategy to load up this month (April) like @lakpr and others mentioned above, that should set you up nicely for the future as well. Anyway, just my 2 cents.
Topic Author
rph12
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Re: Whoops - Emergency Fund Way Too Big

Post by rph12 »

I wanted to express my thanks for your input so far, I really appreciate it!

I think I'm going to use the gift-box technique for I Bonds and consider it part of my fixed income portfolio until they start reaching redeemable status, and then I will rotate my MMA and rolling 1 month T-Bills to something like VTI as the I Bonds become redeemable.

If I want to add gold, I'll do it elsewhere.
samulta52
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Re: Whoops - Emergency Fund Way Too Big

Post by samulta52 »

Aren't the funds in gift box in state of limbo until that gift is delivered?
lakpr
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Re: Whoops - Emergency Fund Way Too Big

Post by lakpr »

samulta52 wrote: Wed Apr 03, 2024 1:43 pm Aren't the funds in gift box in state of limbo until that gift is delivered?
They are. If I understand the OP correctly, he is going to keep the I-bonds as part of the fixed income; but when they become redeemable, he's going to exit out of the *MONEY MARKET FUNDS* into VTI rather than redeeming the I-bonds.

I could be wrong, but that's how I interpreted the "and then I will rotate my MMA and rolling 1 month T-Bills to something like VTI as the I Bonds become redeemable."
Topic Author
rph12
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Re: Whoops - Emergency Fund Way Too Big

Post by rph12 »

Yes, that is correct! The MMA and T-Bills will be my emergency fund until the I Bonds are available for an emergency.
samulta52
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Re: Whoops - Emergency Fund Way Too Big

Post by samulta52 »

lakpr wrote: Wed Apr 03, 2024 2:28 pm
samulta52 wrote: Wed Apr 03, 2024 1:43 pm Aren't the funds in gift box in state of limbo until that gift is delivered?
They are. If I understand the OP correctly, he is going to keep the I-bonds as part of the fixed income; but when they become redeemable, he's going to exit out of the *MONEY MARKET FUNDS* into VTI rather than redeeming the I-bonds.

I could be wrong, but that's how I interpreted the "and then I will rotate my MMA and rolling 1 month T-Bills to something like VTI as the I Bonds become redeemable."
Got it, thanks.
aristotelian
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Re: Whoops - Emergency Fund Way Too Big

Post by aristotelian »

What is the "risk curve"? There is a yield curve for bonds. Stocks do not really have a curve, either you accept the volatility or you don't. A target date fund is merely a blend of stocks and bonds. It is not guaranteed to go up over any timeframe. You could accomplish the same overall allocation as a target date fund by investing a smaller amount of your emergency fund.
Topic Author
rph12
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Re: Whoops - Emergency Fund Way Too Big

Post by rph12 »

Risk curve, risk tolerance, risk spectrum - basically I meant I wanted to preserve purchasing power without going straight to my normal asset allocation...
Lawyered_
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Re: Whoops - Emergency Fund Way Too Big

Post by Lawyered_ »

jfave33 wrote: Tue Apr 02, 2024 2:41 pm Typical wisdom says move the excess to your main portfolio and invest per your AA.

If that makes you uncomfortable then your new emergency fund is too small. Maybe 9 months or a year would be better.
Exactly this. If you want to be conservative, use 1 year for your EF and then invest the rest per your asset allocation.
austin757
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Re: Whoops - Emergency Fund Way Too Big

Post by austin757 »

I vote for 1 year emergency fund and invest the rest per your asset allocation. I worry about my job security and keep a 1 year minimum EF.
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