Yet another Retiree Emergency Fund Question - Income floor vs EF?

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Sandtrap
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Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Sandtrap » Thu Jan 11, 2018 3:01 pm

As a tangent to "sequence of returns risk" posts of late, it might be helpful and actionable, to look at Emergency Funds in retirement differently than in the "accumulation phase".
For "retirees", the EF can now act as a "buffer" and/or "safety margin" to mitigate "sequence of returns and other risk".

There are some that have 99% in funds and can do so because of a solid post retirement floor income provided by SS, Hefty Pension, SPIA or other Annuities, etc. Their EF may be smaller. There floor income stream provides a safety margin.

But, there are others that may not have a diversification of income streams post retirement and depend on portfolio withdrawals, SS, etc. In this case their EF must be larger to address their needs in case of market fluctuation.

This assumes that in both scenarios, the EF is enough to cover personal and financial "normal" emergencies.

I'm tackling just how much in an EF in CD's, etc, (safety of principal) I might need in retirement and input from others and their scenario will help me take action. Also others who are in retirement or planning for it.

Question: How many months EF do you think a retiree, or yourself, should have vs their floor income streams? Is there a relationship? Explain actionably?

thanks everyone of the input and education.
mahalo
j :D

Past thread archives on the same subject for reference:
Emergency funds really necessary in retirement?
viewtopic.php?t=113349
Do retirees have emergency funds?
viewtopic.php?t=131688
EF in Decumulation phase vs 3-6 mos. in Accumulation Phase
https://www.bogleheads.org/forum/view ... hp?t=78442

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David Jay
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by David Jay » Thu Jan 11, 2018 3:31 pm

I'm in the "Zero" column. No need for an emergency fund after 59.5
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

delamer
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by delamer » Thu Jan 11, 2018 4:19 pm

Does this emergency fund need to be different than a cash allocation in your investments?

There are three reasons to hold cash in retirement — 1) money needed for regular, ongoing expenses not covered by annuituzed income, 2) money needed for short-term, irregular but predictable expenses (like a new car), and 3) money needed for short-term emergency expenses.

There is not any obvious relationship between these three that comes to mind. For the third, I’d think something in the neighborhood of $10,000 would work for me. It’s hard to imagine needing more than that in cash immediately. Also, credit cards and a HELOC would bridge any gap temporarily, if needed.

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CABob
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by CABob » Thu Jan 11, 2018 4:32 pm

David Jay wrote:
Thu Jan 11, 2018 3:31 pm
I'm in the "Zero" column. No need for an emergency fund after 59.5
Since I am over 59.5 I suspect that I am in agreement with David Jay however I would state it as, "My entire portfolio is an emergency fund."
Depending upon the nature of the emergency and how critical it is I might use any part of my portfolio supplemented by selling my house, credit cards and loans, family and friends, and probably robbing a bank. I certainly hope that I never have an emergency that is this critical but one never knows.
I also have an allocation that has a fairly high percentage of cash in savings and money market accounts (perhaps as much as 10%) which would meet the definition of many as an emergency fund.
Bob

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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by UpperNwGuy » Thu Jan 11, 2018 4:51 pm

People often talk about emergency funds while remaining vague about the possible emergencies that the fund is supposed to cover, and the likelihood of those emergencies occurring. Job loss, medical crisis, or loss of home to fire, earthquake, or flood (or any of these happening to one's immediate family members) seem to be the likely examples.

I'm retired and drawing a decent pension, so job loss doesn't apply to me. I have health insurance for any possible medical crisis. I have insurance to cover loss of housing. Accordingly, I don't think I need to hold a large sum of cash for unknown emergencies.

I do maintain a savings account for major auto repairs and routine auto replacement, and another for those rare medical expenses that are not covered by insurance, but I do not maintain "x number of months of living expenses" in cash as an "emergency fund."

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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Meg77 » Thu Jan 11, 2018 5:08 pm

I think a cash cushion of 3 months expenses is appropriate if you have no steady income from pension or social security - or even if you do, just for peace of mind. Beyond that you're drawing from your portfolio, probably at least quarterly, so there's no financial need to hold more cash than that (there may be a psychological benefit, but no financial one). Just pull from bonds instead of stocks when the market is down.
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by SimplicityNow » Thu Jan 11, 2018 8:37 pm

A question concerning the amount and/or need for an emergency fund was asked at the most recent boglehead conference.

Among the responses from the panel of experts, Alan Roth (How a Second Grader Beat Wall Street) said it wasn't as necessary to have cash on hand as it
was to have access to cash (credit cards, etc.) Jonathan Clements (How to Think About Money) said he thought an emergency fund is really an unemployment fund and if you have funds in a taxable account there was really no need for a separate emergency fund.

To me, I think some of it is simply semantics. If you have short term or no penalty CD's in your taxable account you could just consider that as part of your
fixed income allocation without labeling it a separate emergency fund. It is really the same thing.

If you want to give yourself a bigger cushion then just increase the fixed income part of your allocation.
Last edited by SimplicityNow on Fri Jan 12, 2018 1:09 am, edited 3 times in total.

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Sandtrap
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Sandtrap » Thu Jan 11, 2018 9:15 pm

David Jay wrote:
Thu Jan 11, 2018 3:31 pm
I'm in the "Zero" column. No need for an emergency fund after 59.5
Okay. You've bend my brain.
Why 59.5 ?????

j :D

SimplicityNow
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by SimplicityNow » Thu Jan 11, 2018 9:49 pm

Sandtrap wrote:
Thu Jan 11, 2018 9:15 pm
David Jay wrote:
Thu Jan 11, 2018 3:31 pm
I'm in the "Zero" column. No need for an emergency fund after 59.5
Okay. You've bend my brain.
Why 59.5 ?????

j :D
Maybe because he has penalty free access to his retirement accounts?

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Sandtrap
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Sandtrap » Thu Jan 11, 2018 10:07 pm

SimplicityNow wrote:
Thu Jan 11, 2018 9:49 pm
Sandtrap wrote:
Thu Jan 11, 2018 9:15 pm
David Jay wrote:
Thu Jan 11, 2018 3:31 pm
I'm in the "Zero" column. No need for an emergency fund after 59.5
Okay. You've bend my brain.
Why 59.5 ?????

j :D
Maybe because he has penalty free access to his retirement accounts?
:oops:

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David Jay
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by David Jay » Thu Jan 11, 2018 10:55 pm

SimplicityNow wrote:
Thu Jan 11, 2018 9:49 pm
Sandtrap wrote:
Thu Jan 11, 2018 9:15 pm
David Jay wrote:
Thu Jan 11, 2018 3:31 pm
I'm in the "Zero" column. No need for an emergency fund after 59.5
Okay. You've bend my brain.
Why 59.5 ?????

j :D
Maybe because he has penalty free access to his retirement accounts?
Correct. Penalty free for my Roth, plus my employer allowed an in-service withdrawal so I rolled my 401k into a tIRA.

I also have a $25,000 HELOC if I need some quick cash (furnace goes out, upgrade a vehicle, etc.)
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Dandy
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Dandy » Fri Jan 12, 2018 6:55 am

I never had something earmarked as an emergency fund. But -- I always had a decent allocation to cash/cashlike products. I do think retirees need to have an allocation to cash/cash-like products. While loss of job may not be something retirees are concerned about don't forget with the loss of human capital even relatively minor expense emergencies can an will likely occur e.g. need a new car/roof/pacemaker?

You don't want to be forced to liquidate depressed assets to pay for these expense bumps. A lot depends on your income floor and real need to continue to pursue growth vs asset preservation - one size doesn't fit all. If you have a decent financial situation then I suggest having several years allocated to "safe" investments/savings not only as a retiree emergency fund but to allow you to fund retirement expenses during a depressed market without having to sell depressed assets.

How much you allocate to "safe" assets is very dependant on your specific income floor, age, health, asset levels etc.

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Sandtrap
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Sandtrap » Fri Jan 12, 2018 2:00 pm

Dandy wrote:
Fri Jan 12, 2018 6:55 am
I never had something earmarked as an emergency fund. But -- I always had a decent allocation to cash/cashlike products. I do think retirees need to have an allocation to cash/cash-like products. While loss of job may not be something retirees are concerned about don't forget with the loss of human capital even relatively minor expense emergencies can an will likely occur e.g. need a new car/roof/pacemaker?

You don't want to be forced to liquidate depressed assets to pay for these expense bumps. A lot depends on your income floor and real need to continue to pursue growth vs asset preservation - one size doesn't fit all. If you have a decent financial situation then I suggest having several years allocated to "safe" investments/savings not only as a retiree emergency fund but to allow you to fund retirement expenses during a depressed market without having to sell depressed assets.

How much you allocate to "safe" assets is very dependant on your specific income floor, age, health, asset levels etc.
Thanks.
That's perfect.
j :D

Waban2000
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Re: Yet another Retiree Emergency Fund Question - Income floor vs EF?

Post by Waban2000 » Fri Jan 12, 2018 2:18 pm

My emergency fund includes
2 year retirement income buffer + cash equal to 2% of my assets
And today, I used it to pay for an unplanned roof expense.

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