Ep # 15 - The Value of Having a Retirement Emergency Fund
Joe and Regan look at having an emergency fund in retirement. They discuss how setting aside three to six months’ worth of expenses can provide peace of mind and financial security, protecting retirees from unexpected expenses without needing to dip into investments or accrue high-interest debt.
They highlight that an emergency fund should be kept in a highly liquid and low-risk account, such as a savings account, to ensure it is readily accessible when needed. The discussion also covers the potential benefits of having a line of credit as an additional backup, especially when markets are down, or large, unforeseen expenses arise.
What You’ll Learn in Today’s Episode
Importance of Emergency Funds in Retirement: Maintaining an emergency fund in retirement is crucial for peace of mind and financial security, protecting against unexpected expenses without needing to dip into investments or accrue high-interest debt.
Liquidity and Low Risk: Emergency funds should be kept in highly liquid and low-risk accounts, such as savings accounts, to ensure they are readily accessible when needed.
Alternatives to Cash Emergency Funds: Having a secured line of credit as an additional backup can be beneficial, especially in scenarios where large, unforeseen expenses arise or when markets are down.
Intentional Financial Planning: Regularly assessing cash flow and being intentional about financial planning ensures that excess cash beyond the emergency fund is strategically invested rather than left idle, optimizing long-term financial outcomes.
Building Emergency Funds Before Retirement: Individuals approaching retirement should start building their emergency fund ahead of time, ensuring they have adequate resources set aside by the time they retire. Working with a financial advisor and sharing all financial details is essential for optimizing financial plans.
Ideas Worth Sharing
· "Just the peace of mind that it gives an individual, knowing that they have a honey pot of money that if no other money came in for the next, whatever amount of time, three, six months, maybe even a year, that they have comfort in knowing that they have enough cash available on hand to fund their lifestyle without any interruptions.”
· “Having that money available is important so that we don't have to maybe do some of the alternatives, which might be putting a big expense on credit cards and paying a bunch of interest that we don't need to pay. Or maybe it's having to pull extra money out of retirement accounts, putting us into a higher tax bracket or something along those lines, or maybe the market's down and we don't want to take a big lump sum when we're selling low."
· "Liquid is the big thing and low risk. Savings account would probably be for this purpose, because I think you have to keep in mind that the emergency fund is not necessarily looking for growth per se in that fund."
· "You want to be intentional about what your goals are and what you're trying to accomplish. And if you're not disclosing all of your assets, then you probably don't have an optimal plan in place."
Resources in this episode
Retirement Planning Simplified
Essential Insights on Building an Emergency Fund for Retirement
Q: Why is it important to have an emergency fund?
A: Having an emergency fund provides peace of mind and financial security. It ensures you have money to cover your lifestyle expenses for three to six months or up to a year. A buffer allows you to navigate unexpected financial challenges without falling into high-interest debt or liquidating retirement accounts during unfavorable market conditions.
Q: What are the potential risks of not having an emergency fund?
A: You may have to rely on high-interest credit cards for large expenses, which can lead to significant interest payments. Additionally, you may need to withdraw extra money from retirement accounts, potentially pushing you into a higher tax bracket or forcing you to sell investments at a loss during a market downturn.
Q: What characteristics should an emergency fund have?
A: An emergency fund should be liquid and low-risk. Savings accounts are ideal for this purpose because the primary goal of the emergency fund is to be immediately accessible and safe. The money should be readily available without the risk of loss or significant penalties.
Q: How should you plan for surplus cash and emergency funds?
A: Working with a financial planner is crucial to intentionally align your emergency fund with your overall financial goals. Transparency about all assets is vital to ensure an optimal plan. Knowing your monthly cost of living and multiplying it by three to six months can help you determine the appropriate size of your emergency fund.
Q: When should you start building their emergency fund?
A: Ideally, you should start building their emergency fund well before retirement. For those within a five-year window of retirement, it's beneficial to calculate your monthly expenses and gradually save three to six months' worth of living costs as part of their pre-retirement strategy. This approach ensures a smoother transition into retirement with financial stability.